By Kishore Jethanandani

Brick-and-mortar retailing co-existed with e-commerce for the last decade or so.  Now Amazon’s gloves are off as it were and it is poised to tear up the very foundations of brick-and-mortar retailing as we have known it for so long.

Amazon’s giant size warehouses, stacked with racks reaching right up to the ceiling, use every inch of space possible for cost reduction.  Computer-aided inventory management keeps track of merchandise and assists in retrieving products largely without human effort with the help of robots[i]. It has already invested in six fulfillment centers and 12 more will be built in 2012[ii]. The capital investments will be recouped by serving third-party retailers who already account for 40% of Amazon’s sales.

Delivery time is reduced with cloud computing[iii] that has the ability to communicate with robots on the floor of warehouses. When an order is placed, robots receive instructions to pick goods from racks and move them to junctions where they can be placed on carousels for transfer to loading points where trucks receive them for shipment to their destination. The entire cycle from order placement to dispatch is automated for same day delivery.

Brick-and-mortar stores, by contrast, are caught in a time warp. A great deal of the energy of store managers is lost in the tedium of inventory management leaving much less time for customer service. Each store owns its own inventory and is often left with excess inventory when demand falls short or is stocked-out in times of unexpected surge in demand. Customers spend inordinate amounts of time to find products lost in the clutter. Newly launched products or unique products for niche markets that are more likely to earn higher margins go unsold as they are hard to discover.

The stores look only a shade better than drab warehouses stocked with merchandise. In an age of mobile phones, video and social networking, retail stores managements are oblivious to the role content could play in whetting the appetite of their customers.

Amazon has found a way to eat the lunch of local retail stores with its mobile application for comparative shopping. Customers are offered monetary incentives to visit and view merchandise at brick-and-mortar stores and compare prices at Amazon’s online store. The ace card in Amazon’s hand is same-day delivery.  Customers have very little incentive to purchase at retail stores if they can instead buy at lower prices from Amazon and have their order delivered the same day.

Brick-and-mortar stores have been jolted into changing their business models or risk their very survival. Macy and Nordstrom[iv], for example, have upgraded their on-line channel that now provides information on available merchandise in any of their stores and ships orders from the nearest store where the products are available. While these changes will lower costs of inventory management, brick-and-mortar stores have no way to match the operating efficiency of Amazon’s new warehouses.

Retail stores are exploring alternative options to remain competitive. The current chorus is to leverage mobile devices and applications to enhance the experience[v] of retailing. New technologies like augmented reality present several ways that will make the experience of shopping more joyful. Customers of clothing, for example, can try multiple alternative designs rapidly in augmented reality saving them the effort of changing repeatedly in dressing rooms. Ikea has an augmented reality application that allows customers to view how furnishings will appear in the environment of their homes. Customers using near-field capable phones can send messages to call for customer service. Shopping would be more convenient if customers could receive notifications about their turn to return goods rather than wait in a queue.  Mobile phones can also provide guides to the available choice of merchandise and where to find it, offer currently available discount coupons and more.

Mobile technology sure will contribute a delightful experience of shopping[vi]. Customers are still likely to opt to purchase from Amazon. Worse, retail stores could invest in new technologies in their stores and end up benefiting Amazon.

The one sure way of countering Amazon’s competitive advantage is to provide an alternative to commoditization in retail shopping. Retail stores could acquire a unique personality with goods and services reflecting the culture and tastes of their location. Out here in San Francisco, I am startled by attendance at the “Fair” trade festivals. The large crowds who throng at such festivals are hungry for the variety of merchandise from all over the world sourced from exotic communities such as craftsmen in the Amazon jungle. Retail stores could enhance the experience with augmented reality with imagery and videos that allow customers to vicariously live the experience of the communities who supply the merchandise.

Another striking example I have observed is the Dutch village in Southern California which attracts legions of visitors. The stores in the village exhibit traditional European apparel, furnishings and artifacts produced by the immigrants who settled in the vicinity. The restaurants all serve European food. The tourists look at the village as not only a shopping destination but also a place for entertainment and leisure and spend more time than they would at a mall. Again, technology could easily enhance the experience with content, information and imagery. Consumers could relate with obscure products and enjoy them a great deal more with augmented reality, video and commentary.

Retail stores could turn the tables on Amazon by using its fulfillment centers and focus on product innovation with related content development and technology to offer a rewarding experience for cus

[i] “Amazon’s Kiva Robot Acquisition is Bullish for Both Amazon and American Jobs”,

[ii] “Amazon Gains As It Improves Distribution Network”, By Danielle Kucera – Jul 27, 2012,

[iii] “Amazon steps up competition in cloud services”, by Paul Demery, Internet Retailer, March 13th 2012

[iv] “Nordstrom Links Online Inventory to Real World”, by Stephanie Clifford, New York Times, August 23rd 2010

[v] “Malls’ New Pitch: Come for the Experience”, by Stephanie Clifford, New York Times, July 17th 2012

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Posted by on July 30, 2012 in Business


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Future of Healthcare in the USA: how it could be the growth engine

By Kishore Jethanandani

Kondratieff cycles, which span thirty to fifty years, are marked by breakthroughs in technology and reform of institutions that drive expansion and a downturn sets in as technologies mature and unnoticed dysfunction in institutions surfaces. This was true for information technologies over the last cycle. Computers were a curiosity as long as the use of behemoth mainframes was confined to some large enterprises. The turning point was the introduction of mini-computers and then personal computers in the 1980s which became, with the advent of the Windows user interface, as much a part of everyday life as the washing machine and the refrigerator over the 1990s.

Concurrently, regulatory reform of the telecommunications industry dismantled the AT&T monopoly; the costs of communications plummeted and paved the way for a pervasive Internet.  Business solutions became the buzzword of the last decade as information technologies found new uses in a broad range of industries.  For the consumer, the home computer and the associated software became as essential as the furniture in their home. The mobile Internet has growing number of applications that make the wireless phone as indispensable as a wallet. The momentum in the growth of wireless phones is expected to be maintained till 2014 partially offsetting the slowdown in the rest of the information technology industry.

The high growth rates that were propelled by innovation in information technologies in the 1990s began to slow down over the last decade. A recent study completed by well-known economist, Dale W Jorgenson of the Harvard University and his colleagues, confirms that growth rates decelerated over the last decade.  The average growth of value added in the industrial economy over the period 1960 to 2007 was 3.45%, with a peak of 4.52% between 1995 and 2000, which slowed down to 2.78% between 2000 and 2007.  The corresponding growth of the IT producing industries was an average of 15.92% over 1960 and 2007, peaked at 27.35% between 1995 and 2000, and slowed down to 10.19% between 2000 and 2007. IT using industries had an average growth of 3.47%, peaked at 4.39% and slowed down to 2.39%.

IT industry has ceased to be a growth engine for the economy and its place can be taken by a revitalized health industry.  For one, there is the enormous demand to extend life and ease the pain of debilitating and uncommon illnesses that are growing with longer life spans. On the supply side, a welter of new technologies for drugs, medical equipment, sensors and information technologies are revitalizing the industry. While technologies for extending life and improving its quality raise costs, some of them can also be used to drastically lower cost in an environment that encourages competition. Thus the twin goals of lower costs and better quality accessible to everyone are possible if the industry is restructured to be driven by market forces.

Meanwhile, healthcare industry’s existing paradigm of medicinal chemistry has run its course. Much of the therapies for an ageing population are effectively palliative which alleviate chronic illnesses, like diabetes, Alzheimer’s and heart disease, without providing a definitive cure. As a result, the costs of health care are ballooning. Chronic illnesses account for a major share of the costs–75% of the total of $2.2 trillion spent on health care in 2007[i]–with 45% of Americans suffering from at least one chronic illness. At this point, the industry is a money sink—really a gorge—unable to meet the needs of the mass market for health. Consumers don’t get care worth their money.

At this point, there is very little effort at prevention of diseases to keep costs low despite the proliferation of devices to forewarn patients and take preemptive action. The onset of stroke, for example, can be detected early with sensing devices and the more damaging consequences such as brain damage can be preempted.

The costs of hospital stays are high and their costs are lowered with remote treatment of patients at home. Hospital readmissions are common among chronically ill patients and happen when patients are not monitored when they return home. A New England Health Institute study found that hospital readmissions can be reduced by 60% with remote monitoring compared to standard care and 50% when programs that include disease management with an estimated savings of $6.4 billion a year.

The inefficiencies in the industry are easily noticeable. Paperwork abounds which is conspicuous by its absence in other industries. Only 10% of the payments to vendors in the health sector are by electronic means which could save an estimated $30 billion. Electronic records can drastically lower administrative costs and help to create databases that can be analyzed to improve the quality of care.

The productivity of the medical personnel is low as a result of excessive paperwork. Nurses, for example, expend only 40% of their time attending to patients while the rest of the time is spent on paperwork[ii]. Radiologists spend 70% of their time in the analysis of images while the rest is reserved for paperwork[iii]. Regulatory compliance compulsions bog down skilled staff in paperwork and alternatives are hard to find when the law is inflexible.

Patients have to take time off from their work, suffer long and wasteful wait times to receive care for even minor conditions in this age of multi-media communications. It gets worse for rural folks who have to trudge to urban hospitals.  Care of dangerous criminals is hazardous when they have to be moved from prisons to hospitals. When emergencies are involved, patients have to be moved from one hospital to another when the required specialized personnel are not available. An estimated 2.2 million trips between emergency rooms happen for this reason. Entrepreneurs could very well help to bring care to patients with remote care technologies and video conferencing. The estimated savings from video assisted consultations replacing transportation from one emergency room to another are $537 million per annum.

Today, technology is available to substitute for doctor’s skills and hospitalization while maintaining the quality of care without forcing down doctor’s salaries by fiat. An example is Angioplasty which replaces expensive surgery for the treatment of coronary disease[iv]. The entire procedure can be completed by a skilled technician or a nurse at a much lower cost than a specialist in heart disease. Innovations of this nature can expand the health market by tapping into the latent mass market for health care.

Therapies are not customized for each patient and often many different options are tried in several hospitals to no avail. The problem is the inability of doctors to pinpoint the root cause of the disease.  Normal radiological methods don’t necessarily help to diagnose a condition. Lately, DNA sequencing methods, such as those offered by Illumina, helped to diagnose the causes of an inflamed bowel of a six year old child after a hundred surgeries failed.  The DNA sequencing data can also be mined to glean insights about the most effective treatments.

Health care costs are high also due to the structure of the industry. In the health delivery segment of the industry, hospital monopolies in local areas and regions raise the cost of services. Consolidations of hospitals are believed to add $12 billion a year to costs. The value chain could be broken up and individual tasks performed with much greater efficiency. Physician owned specialized hospitals are fierce competitors of General Hospitals especially in states with lighter regulation. In the thirty two states in which they do exist, physician hospitals are the top performers in nineteen of them and among the top in thirteen[v]. Regulation prevents them from operating in the remaining twenty of them.

In the risk management component of the industry, insurance plans are not portable outside a state or a medical group. Most insurance plans are paid by employers or by the Government for the elderly. Users of insurance plans don’t have much incentive to shop for health care or realize savings by participating in wellness programs. Health Savings Accounts (HSAs) put consumers of healthcare in charge of their choices by letting them spend out of their own pocket or from savings reserved for the purpose. They are expected to drive down costs by shopping for alternatives, evaluation of the value they are receiving for the money they pay and by becoming more aware of their own health risks. The evidence about the experience with HSAs is mixed; enrollment has increased, premiums are lower compared to traditional plans[vi] and their rate of increases is lower. The differences are smaller when adjustments are made for the age and the risk of the buyers of consumer plans and the traditional plans[vii]. On the other hand, the evidence on quality of care received by buyers of HSAs is mixed as is the care they take to search for their best option and lifestyle choices to lower their healthcare costs.

Innovation will begin to drive the health care industry and become the growth engine for the economy when costs and the corresponding quality of service are transparent and comparable. Currently, costs are estimated for individual departments and not by conditions and individual patients[viii]. It’s only then that consumers will shop for the best offering and switch to the most competitive offering and entrepreneurs will know where they can find opportunities to compete with incumbents. Even by rough measures, the quality of care, for the same expense, varies enormously—by a factor of 82[ix]

The search for the most desired doctors and therapies, with the best value to offer for the price paid, is arduous. Price for medical services varies enormously and comparisons are hard to make because of a maze of discounts offered. Most consumers of health have no incentive to shop for health care as their insurance plans are paid for by their employers. Aggregation of information and electronic searching will lower the costs of finding the best doctor and therapies.  As patients search for the best option, it will also stimulate competition among vendors. The experience with high-deductible plans does show that health costs drop when users do shop around, compare before they buy healthcare.

The inefficiencies in the health industry are an enormous potential opportunity for growth which will receive another fillip when new bio-tech products move up their S-curve. For the USA, with its lead in medical innovation, there is also an opportunity to expand overseas where again health systems are largely inefficient. The key to tapping the latent opportunity is an environment that encourages technological innovation and competition. Employer paid health insurance plans or Government paid health insurance will be most effective when they encourage individuals to buy their own insurance plans and manage their own risk. For the rest, billions of consumers shopping for health care will drive down costs much faster than any group insurance or a Government department. At this point in time, the health marketplace offers very little data to make comparisons or even the flexibility to switch from one source to another. The incentive for cost reduction and to adopt new innovations will be the greatest when vendors deal with a more competitive environment.

A new paradigm in health care will be possible in such a competitive environment. Genomics, together with bio-technology, nanotechnology and medical devices, health IT, and sensors, will help to launch treatments that have for very long been elusive and affect large masses of people. Additionally, they are customized for each patient, who could be immune to standard treatments, and they have a much greater focus on prevention. These technologies are also able to shorten the duration of the illness, replace damaged organs and reverse the degenerative effects of ageing. Hypertension and high blood pressure, for example, affects 20% of Americans and the available cures generally require life-long treatments. The discovery of the relationship between genetic mutations and extremes in blood pressure[x] has improved an understanding of possible preventive treatments for high blood pressure.  Diagnostic tools, which detect changes in the protein structure, will anticipate the onset of dreaded diseases like cancer and enable advanced action before the disease becomes incurable, Early results are accurate and clinical adoption is expected to come soon[xi].

[i]  “Almanac of Chronic Disease”, 2009.

[ii] “Growth and Renewal in the USA: Retooling America’s economic engine”, McKinsey Global Institute, 2011

[iii] “Strategic Flexibility for the Health Plan Industry”, Deloitte.

[iv] “Will Disruptive Innovations Cure Health Care?” by Clayton M. Christensen, Richard Bohmer, and John Kenagy in Harvard Business Review.

[v] Consumer Reports quoted in “Why America needs more Physician hospitals”, The Senior Center for Health and Security, August 2009

[vi] “Generally, premiums for CDHPs were lower than premiums for non-CDHPs in all years except 2005, when premiums for HRA plans were higher than premiums for non-CDHPs. By 2009, annual premiums averaged $4,274 for HRA-based plans, $4,517 for HSA-eligible plans, and $4,902 for non-CDHP plans. Note that the $4,517 premium for HSA-eligible plans includes an average $688 employer contribution to the HSA

account. Hence, premiums for HSA-eligible coverage were $3,829 for employee-only coverage in 2009”, in “What Do We Really Know About Consumer-Driven Health Plans?”, by Paul Fronstin, Employee Benefit Research Institute

[vii] op cit

[viii] “Discovering—and lowering—the real costs of health care”, by Michael Porter, Harvard Business Review,

[ix]  “When and how provider competition can help improve health care delivery”, McKinsey.

[x] “The future of the biomedical industry in an era of globalization”, Kellogg School of Management, 2008

[xi]  “In this case Proteomics is being used as a diagnostic tool and early data from the projects have been very positive with the computer software managing to identify 100% of ovarian cancer samples (when compared to a healthy sample) and 96% of prostate cancer samples. With these positive results it is surely only a matter of time before diagnostic Proteomics is seen in a clinical setting”, in “Could Proteomics be the future of cancer therapy?



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Future Prospects for Emerging Markets: Super-cycle or a new quagmire in agriculture?

By Kishore Jethanandani

The third super-cycle led by emerging markets was the theme of the annual gabfest at the World Economic Forum this year. Standard Chartered Bank’s white paper on the subject created its intended buzz. The optimism sure suggested comfort with the latest recovery among the chief executives of the world. Emerging markets have been the engine of the latest recovery but signs of trouble are already noticeable. Agriculture, largely untouched by successive waves of economic reform, will act as a brake on growth in these economies.

The last green revolution, propelled by hybrid seeds and chemical fertilizers, has exhausted its potential. Commercialization of genetic engineering for plants is at an early stage of implementation. The supply chains for food in emerging markets are antiquated, with primitive cooling systems, and waste about half the food in transit. Farms look more like backyards. Negotiations on the Doha Round for agriculture trade have been going in circles for the last ten years.

While the recent upsurge in food inflation has been blamed on climate change and vagaries of weather, the reality is that emerging markets face a structural supply problem in agriculture which is not going away anytime soon.  Demand for food is rising rapidly with growing incomes but supply is falling short. Central banks in emerging markets will have to increase interest rates to tame inflation and growth will slow down.

Fears of overheating of emerging markets economies, bubbles and speculators have re-emerged following the recovery from the 2008 crash. This time around two new piquant elements have been added to the story by quantitative easing, a misnomer for debt monetization, and a rise in food and commodity prices in emerging markets. The two are seen to be inter-related; quantitative easing is said to create excess money supply that feeds into the carry-over trade, with low interest rates and stagnating developed economies, and increases the demand for holding inventories of commodities and food in emerging markets.

Over the course of the last decade, financial markets in emerging market economies, especially emerging Asia, have matured and are less susceptible to sharp fluctuations induced by capital movements. Foreign capital inflows are offset by capital outflows from emerging markets. The outflows neutralize any excessive exchange rate appreciation, as a result of herding behavior, or increase in money supply as a result of central bank policies to sterilize reserves. The composition of foreign capital inflows has changed as the share of foreign direct investment increases.  Foreign direct investments, unlike portfolio capital, are less likely to respond to short-term risks. Finally, the growth of local currency bond markets is a buffer in times when foreign capital flows back.

In the period between 2002 and 2007, Emerging Asia and Latin America had by 2007 achieved a net capital inflow (foreign capital inflows minus outflows from emerging markets) of zero while emerging Europe had a net capital inflow of 14% of GDP[1]. Unsurprisingly, the deflation that followed the recession of 2009 was far more severe in emerging Europe than in emerging Asia or Latin America.

Additionally, the composition of capital inflows into emerging economies had changed considerably with an increasing share of foreign direct investments. While portfolio investments increased by $ 0.9 trillion between 2002 and 2007 to all emerging markets, FDI surged by $1.5 trillion[2]. Foreign direct investments don’t fluctuate as much as portfolio capital inflows; the volatility of foreign direct investments during the last global financial crisis was 0.04-0.45[3] in a cross-section of Asian economies compared to 0.51-31.41 for portfolio investments[4].

A particularly noteworthy development was the incipient growth of the Asian corporate bond markets during the Great Recession. Corporate bond issuance in Asia increased from about $0.4 trillion dollars in the second quarter of 2009 to $0.85 trillion dollars in the fourth quarter[5]. The pace of expansion of was particularly rapid in India, Korea and Indonesia as the cost of bonds fell below bank rates and their Governments supported bonds for the SME sector with guarantees. Over the long-run, local currency bond markets will offset the risks of reverse flows of foreign capital inflows.

The spurt in capital inflows into emerging markets, over the last two years, has raised alarms well before their volumes have recovered to their 2007 levels. At their peak in 2007, net foreign capital inflows were 10% of GDP and in 2010 they recovered to 7% of GDP. Of the $533 billion in reserves added in 2009, $391 billion accrued from current account surpluses and in 2010 the corresponding estimated figures were $832 billion and $369 billion or $463 billion of net foreign capital inflows[6] (after deducting outflows from emerging markets).  At their peak in 2007, the total reserves were $953 billion and current account surplus $436 billion with a net foreign capital inflow of $517 billion (after deducting outflows from emerging markets)[7].

While the net foreign capital inflows (or incremental liquidity) are close to their peak in 2007, it would seem premature to be overly concerned about inflation expectations based on capital inflows data alone especially since most developed world economies are still performing well below their peak level which eases the pressure on demand for energy and commodities. A great deal of the surge in inflows into emerging markets involved the restoration of supply of trade credit after its abrupt disruption following the collapse of Lehman Brothers[8]. To the extent trade credit helps to increase production in the export sector, it will not have an inflationary impact or raise exchange rates.

Price pressures in emerging markets, during much of 2010, remained modest due to abundant spare capacity except in some commodities and food items[9]. Sustained pressure on metals prices was due to massive infrastructure investments in China and wheat prices had an upward bias due to supply constraints. Energy price rise was tempered due to spare capacity in oil and the shale oil revolution in the USA which allows for re-direction of LNG to other countries. There were also price surges as geo-political or weather risks disrupt the tenuous balance in supply and demand. Food prices were affected by the El Nino weather patterns, oil prices by the fire in the Gulf of Mexico and copper by flooding of mines in Chile. Metals prices are likely to keep increasing due to lags in mine development.

The management of interest rates by Central Banks in emerging markets, in an environment of intractable event-driven economic variables, is challenging and the bias is likely to remain mildly expansionist in 2011 as the demand for exports from the developed world is still relatively slack. To the extent upward price pressure is not systemic but is influenced by more transient causes such as weather patterns, geo-political shocks and sector-level fluctuations, central bankers will struggle to determine the timing for raising interest rates.

There is much greater room available in fiscal policy to offset the effects of increasing capital inflows into emerging markets without taking recourse to capital controls. Emerging markets expanded their fiscal expenditures and allowed their budgets to run higher deficits to soften the deleterious effects of the global recession. The average budget deficit in emerging markets increased from 0.7% of GDP to 4.8% of GDP between 2008 and 2009[10]. India was an outlier with deficits much higher than the average at 7.9% and 10.2% of GDP. The contrasting rates of inflation in emerging markets and India suggest that a great deal of pressure on prices could be eased by a more restrictive fiscal policy.  While the consumer price index in emerging markets increased by 3.1% in 2009, prices increased by 10.9% in India and projected increase in 2010 was 6.1% and 13.2%[11].

Emerging markets are better able to withstand the shocks of rapid capital movements and their recent experience belies myths perpetuated by financial disasters experienced in the past. The risks in the current environment are largely a result of potential inflationary impact of supply shortages of food and commodities exacerbated by expansionary monetary and fiscal policies.  As long as growth rates are sub-par in the developed countries, fiscal and monetary policies in emerging markets will be the most important determinant of rates of inflation in the short-term. Central banks are likely to err on the side of monetary expansion as long as emerging markets don’t achieve their potential output in the commercial sector. Fiscal policies have a more political motivation and leave some leeway to lower rates of inflation.

Over the longer-run, the slow growth in agriculture will add to the complexities of fiscal and monetary management. There is no way that emerging markets can sustain their growth without major decisions to improve resource allocation efficiency in their rural sectors.

[1] “The financial stability implications of increased capital flows for emerging market economies”,by Dubravko Mihaljek, BIS Papers Number 44, 2007.

[2] Mihaljek, op cit

[3] Measure by coefficient of variation

[4] “Capital flows and Real Exchange Rates in Emerging Asian countries”, by Juthathip Jongwanich, Working Paper Series No 210, Asian Development Bank, July 2010.

[5] “Sovereigns, Funding and Systemic Liquidity”, Global Financial Stability Report, International Monetary Fund, October 2010

[6] “Capital flows to emerging market economies”, Institute of International Finance, January 24th, 2011

[7] “Capital flows to emerging market economies”, Institute of International Finance, Oct 12th 2008

[8] “The impact of the financial crisis on emerging market economies”, by Jack Boorman, Emerging Markets Forum, 2009

[9] “World Economic Outlook”, IMF, October 2010 and “World Economic Outlook Update, January 25th 2011.

[10] “Fiscal Monitor”, January 2011

[11] Quoted from World Economic Outlook, 2010, IMF


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Posted by on March 8, 2011 in Uncategorized