What Could Happen in 2012 (and Beyond)

Byron Wien, the Election, the Economy, Immigration, China, India, South America, Education–surprises!

Byron Wien does the most thorough job of putting together thoughtful, provocative and useful ideas on possible surprises for each year. I have been fortunate enough to know Byron and to participate in the Third Thursday group on which he draws, in part, to test both conventional wisdom and real surprises. I could not attend the December lunch this year as I was in India. Below is the email I sent Byron in late November. I will use that as the start of my thoughts on surprising things that could happen in 2012 and will then toss out a few additional ideas. Here we go:

“Byron, Am heading to India on Friday. Sorry I will miss your pre-surprise lunch. Am attaching copies of the text and slides I will be using in India. I don’t think they say anything you don’t know, but you might find something in there…My big surprise is that Joe Biden will not be the VP candidate in the coming election. Second surprise would be that the US does better than expected in 2012 given the debacle in Europe. Neither China nor India do as well as currently expected and China steps up to do something in Europe–maybe buy a Greek Island? They need Europe. Brazil starts to look a bit like Argentina–I think they are way understating their inflation rate. Capital flows our way and the RU dips into the 7’s before the election. If so, Obama wins in a walk. The really big surprise would be Huntsman as the Republican candidate–or maybe Obama’s VP candidate? What a ticket that would make. Jack”

The idea of surprises is to get people thinking away from trendlines. I use Byron’s definition, which is a personal belief that there is greater than a 50% chance of something happening where conventional wisdom is less than that. Let’s continue:

1) It is hard to see us getting through the year without an energy crisis of some type where demand significantly exceeds supply and oil prices spike once again. This could stem from trouble in the Middle East, Africa or Asia. It could be brought about by some covert action by the US that has been in the works for some time and comes to fruition within the next 10 months. There are too many possibilities for this not to have greater than a 50% chance of occurring within this calendar year. The combination of a hydrocarbon energy crisis combined with a major climate disaster somewhere in the world will lead to policy actions on the part of the US to accelerate both natural gas development and alternative energy development as well.  Energy efficiency finally begins having its day. Talk of a carbon tax grows particularly as other countries implement implicit and explicit carbon pricing.

2) Contrary to a normally quiet year during a transition of leadership, to some extent forced by an “Asian Spring” throughout the region, China takes several bold steps in response to a more activist populace upset with corruption, the environment, and some areas of economic stress, combined with a desire by Hu and Wen to put more of their stamp on the future.  This includes major acquisitions in the developed countries as well as the opening of manufacturing and service facilities. At home, R&D is accelerated particularly in alternative energy, space and IT processing. Subsidies for hydrocarbons are reduced or eliminated and an explicit carbon tax is put in place. Following Australia’s lead and China’s moves, several Asian countries put in place mechanisms to reduce their use of conventional hydrocarbons for energy–although everyone finds that they have 200 million year-old hydrocarbons in shale formations and begins using the immature  production technologies developed in the US, creating even more environmental disasters.

3) As the US economy grows, corporations find qualified hires difficult to come by. Enlightened corporations, led by GE,  become educational institutions to provide skills and basic knowledge to a work force that has been idle and undereducated by the public systems which were supposed to do the job. Corporations become much more vocal about bringing illegal immigrants into the US system, expanding visa programs and finding other mechanisms to add talented labor to the pool domestically. It becomes clear that a controlled amnesty program for current illegals in the US will add significantly to GDP and to government revenues. The tide begins to shift on immigration issues.

4) The US labor situation is aggravated in the short term by decisions on the part of several US corporations to bring manufacturing operations back into the States.  Labor costs are rising elsewhere and the elements of control, rule of law, productivity and relative safety lead to better economics manufacturing locally. Caterpillar’s actions with its Canadian operations start the ball rolling. As stated above, US corporations take on a significant role in training and general education to meet their labor needs.

5) In spite of the demand for its natural resources, South America finds itself in much more turmoil politically and economically than one might expect. Natural disasters from climate change and it’s young mountain ranges compound economic issues from changes in export markets and a continuing misallocation of financial resources. Led, once again, by problems in Argentina, some degree of turmoil ripples north through the continent into Central America and requires more of the attention of the US than we have been willing to give thus far. Immigration to the US, both legal and illegal, accelerates as the US economy picks up steam.

6) India becomes a focal point. With an economy not growing adequately to provide jobs, upward mobility and political stability, India looks for diversions. Troops move north to “prepare” for confrontation with China, and west to confront Pakistan. Some elements internally are confronted as well. While the numbers show growth, the quality is somewhat problematic. Energy shortages push India toward even more aggressive alternative energy policies.

These aren’t all of the surprises we will find in 2012. I must say I continue to be optimistic about the US in spite of the crazies in Washington and the anger, bigotry and fear manifesting itself during the Republican primary battles. All of those who were planning on moving out of the country if Obama was re-elected–the ABO crowd– or any of the Republican choices–the ABAR crowd, might want to reconsider.

The Economy, The Environment, Lessons Learned, Opportunities Today

A speech given to venture capitalists & entrepreneurs in India in December 2011

I am very pleased to be here today.  I come to India regularly for pleasure and for business although it is always a pleasure. What I plan to do is provide an economic and market context on what has happened in the United States trying to draw some parallels and contrasts to Asia – India specifically – and Europe. I will start with some history, review where we are today and then venture some guesses about where we may be going. I will relate that to what happened in the venture world historically, again to compare and contrast with what is happening here in India. I will then turn to the opportunities this presents. Several of you here today are investors, and your allocation to potential investments is made in an economic context regarding returns relative to risks. So lets start with economics.

Some history:  I am not sure that recent history provides one with the right context, so it may be helpful to look at a longer time span, which could provide a better perspective. I will give a caveat that “perspective” is an overused word. (As is “caveat” for that matter.) Jane Smiley, a great writer, may have been right when she had one of her protagonists define perspective as actually believing that two parallel lines meet.  Maybe you have to be an engineer to appreciate that. At any rate, this is my point of view and my sorting of the data and my perspective—one that is US centric, partly because it would be presumptuous for me to tell you about your own country, and partly because it represents a model that may be useful to understand.

I am not going to present a comprehensive picture of the economy and the markets. Instead, I will highlight a few points that I think have some relevance to investing today. Let’s start with GDP growth in the United States since World War II.

The US has had 12 recessions since the Second World War.  What is most interesting to me about this recession are 1) the year over year decline has been greater than any of the post-War recessions, 2) the rate of recovery compared to earlier recessions has not been as high, and 3) the official recession exceeded both the 81-82 and 73-75 recessions by a few months. In addition, we haven’t seen a 5% year-over-year GDP gain since late 1999.  High oil prices and Central Bank tightening were the primary causes of the other two lengthy recessions.  This latest one is much more of a financial crisis like a quarter of the 47 recessions the US has had in the last 220 years. Several of those financial recessions were substantially longer and in many cases deeper than what we have experienced thus far. In almost all cases the crises extended globally or even originated elsewhere in the world, primarily England. This crisis is certainly global. And has manifested itself serially from the US to Europe and is now affecting Asia, including India.

However, in the US, which was first to see the downturn, away from the construction market and its impact on economic activity, the rest of the US economy is actually doing well and is growing. And importantly, in my view, it may be approaching self-sustainability.  Profits have more than doubled from their lows in 08 and are 20% above their peak in 06.  In some ways the US securities market reflects this off of its lows generated by the fallout from the Lehman bankruptcy.

I am referring to the S&P Technology Sector, which while still way below its peak in the dotcom bubble is at levels seen in 1998 before the 18-month blow-off produced that final peak in March 2000.

This index is a reasonably good proxy for what has happened to overall values in the venture capital world in the US.  A caveat I would add though, is that while values have tracked one still has to be somewhat concerned about valuations.

The overall valuation in the US, while down, is still above the lowest Price/Earnings ratios that have been hit in the longer cycles of valuation in the market. One can come up with a variety of reasons why valuations may not go to previous lows experienced, but I have to say there were always a set of reasons why valuations could not go lower.   I think it is useful to look at valuations in the public markets, as history shows that private equity valuations tend to track public market valuations overall and by sector going in and coming out.

Valuations in India are not low by historical standards. This does translate into private equity valuations and does raise some points of caution.  It goes without saying, but I would make the point that the valuation one gets going into an investment may be one of the best determinants of the ultimate return.

Historically, the US is bouncing closer to the bottom of a price channel waiting for earnings growth or possibly further market declines to bring down the multiples a bit more. We can review how the US got to this point and where we are likely to go from here. This pattern does relate to what is happening globally.

It is a fairly simple picture. We overleveraged the economy to support consumption, which in turn has led to a very significant trade deficit, about half from overconsumption and about half from dependence on others for our hydrocarbons.  This is a US and European problem for the most part, but to some degree it exists here and in other parts of Asia as well. As we work our way out of this problem it will likely result in lower overall growth in the Western world for a number of years. Europe is likely to show negative numbers next year—maybe even this quarter.  I would point out though, that in the US, there are some positive indications. If one looks at total debt outstanding, the number has actually flattened, with government debt replacing private debt. The ratio of debt to GDP has fallen as well-still high but falling. US corporations have significant enterprise capacity if they only had the confidence and the opportunities for investment. They ultimately have to do something with their cash.  I would also make the point that US banks, in contrast to other banks around the world, are accumulating cash. Deposits are up. The Federal Reserve has bought paper from the banks, and the Europeans, South Americans and others believe that their liquid assets may be safer in US banks than their own. In addition, if the dollar stays where it is or weakens particularly against the Asian currencies we would move closer to values we saw during the 90’s.  A point I am making is that part of the growth in the 90’s in the US was fueled by a lower dollar than we have today.  From its low in 1988 the dollar marched up doubling in value over the next ten years and today is still 50% above that trough but in a recent decline.

However, China’s currency has been rising. On balance, I believe other Asian currencies will track China’s over the long run.

India’s currency tracked China’s earlier this decade but I think internal issues and some concern about the impact of the European problems have affected values more recently. I do believe in the long run, based on economics, the Rupee is likely to strengthen against the dollar. Internal issues, for example allowing for Foreign Direct Investment, could affect the timing and degree of strengthening as trade balances shift.

Looking at High Tech trade, which is a good proxy for some of the venture activity, aided to a measurable extent by the lower dollar and Moore’s law, the US had a positive trade balance annually in High Technology Products through the 90’s. Lots of factors have affected the numbers over time, but the net of it is the US went from roughly a $24 Billion annual surplus at the end of that decade to a $96 Billion annual deficit in 2010. I think the dollar has been an important factor. Looking at India specifically, overall, this year you will have about a $15 Billion annual trade surplus with the US. Actual exports have doubled in the last 5 years and will likely be $36 Billion this year. Venture-backed companies should be getting their piece of that.

I do believe in the long run, currency adjustment may be the most important factor in job growth in the US, and possibly Europe, reducing the labor arbitrage that now exists between the developing world and the developed world. This will require significant productivity improvement in the developing world to offset higher currency values.

It is unlikely the dollar gets back to the lower end of the 90’s level in a straight line any time soon, because, right now, given our relative growth and safety, we see capital continuing to flow in our direction adding some strength to the dollar. However, over the next decade or more, the dollar is likely to weaken, particularly against the Asian currencies.  As the dollar adjusts and the economy does show modest growth, the capital is there in the private sector to finance growth once there is some certainty about where it will come from and if the Europeans can deal with their deficits. Many of those dollars will make their way overseas seeking that growth and creating jobs, if local policies are supportive. Let’s also remember that while the US may be running a trade deficit in high tech products, it is exporting at a $288 Billion annual rate and importing at a $192 Billion rate.

And, in spite of its overall trade deficit with almost every country on the planet, the US still exported over $1.4 Trillion of goods. And not counting oil imports the US bought $1.8 Trillion of goods from the rest of the world. Indian corporations big and small, startups or established companies, can certainly take advantage of the demand that continues to exist in the US for products–and services as well.

While there is a risk that, given the political rhetoric, we could find ourselves aborting the recovery that is starting in the US and is likely to spread, logic or sanity should lead us to a different set of conclusions. This could set the stage for a very interesting investment environment. Globally, particularly in the faster growing developing world which I define as the BAICs not the BRICS—Brazil, Africa, India and China, infrastructure spend and total investment will continue to rise to meet the demands of the populace and the demands of the global marketplace for their products—both natural resources and manufactured goods and some services.  This is continuing to bring more individuals into the middle classes with their own set of demands and needs.

Brazil, India and China, as well as most of Africa have a long way to go before the mix of their economies comes anywhere close to the more mature world. But look at what is ahead.

If we look at a breakdown of GDP and employment by major sector—agriculture, industry, and services, for two developed world countries and three of the BAICs—I don’t have stats for all of Africa–, we will see that India, Brazil and china have a much higher percentage of GDP and employment in Agriculture. To make this a little clearer, let’s take Agriculture and compare the US, Germany and India. US agricultural output represents about 1.6% of GDP and employs 1% of the work force. Germany is at 1% of GDP and 2% of the workforce. India is at 18% of GDP but over 50% of the workforce is still employed in agriculture.  Today’s mix has some similarities to where the US was earlier in the 20th century, although with higher manufacturing and lower services.  China looks even more like the US at that time.  We are talking about large populations shifting from the agricultural sector to manufacturing and services over the next few decades. This carries with it some political risk and not necessarily a smooth transition. But, this also means on balance, growth. And I would make an important point: It is easier to innovate into growth than it is into replacement.

Growth requires a sense of urgency. Everything speeds up. One does not want to get left behind. There is also an opportunity to experiment and, of course, to fail. But growth covers up many sins and extends the runway to get it right. And, it usually results in multiple approaches to opportunities and problems. Let me elaborate further on this point–that it is easier to innovate into growth than replacement. The economics are different if, instead of simply taking away share from an established player, one is participating in an expanding market. Particularly, when it comes to plant and equipment, customers are making a different calculation if it is an expansion cost vs. a replacement cost. In any instance, replacement or expansion, I believe that most innovations relate to some form of productivity improvement. It is worth thinking about any venture investment in terms of productivity–whether in Social Media or cell phones where the productivity of connecting with others has been enhanced, diagnostics, medical outcomes, energy, agritech, measurement itself, or infrastructure.  When growth is uncertain or out on too far a horizon it becomes more difficult than it already is.  I think the best venture capitalists understand that, to some extent adding a vision that may see growth potential where others don’t. And, many of the best VC firms are on multiple continents having extended their reach to one or more of the BAICs, in particular, to take advantage of changing income levels and a growing consumer class; in other words investing into growth. Some would even say that innovation requires consumption growth. Successful innovation also requires the VC experience and a VC infrastructure as foundations.  I don’t totally accept what some are characterizing as the US exceptionalism, is that exceptional. And that other systems are not producing innovators. Not every engineering or science graduate–or dropout for that matter–in the US is an innovator. I have to believe that the distribution of potential innovators in any country is the same, and ultimately the infrastructure that permits that innovation will exist there as well. In some instances, it is already happening.

Asia and Europe combined are putting more venture capital to work than the US and have been since 2006. India and China are putting Rupees and Yuan to work at about 40% of the US rate. And the rest of Asia is quite vibrant as well.  What is lacking is both a long enough history of repeatable success, and the Tim Harford observation—Harford of the Financial Times–of the Galapagan Isolation vs. Corpocracy, as represented by Silicon Valley, Silicon Alley, the Silicon Wadi of Israel or the other pockets within the US and elsewhere that include investors with reach, experience and staying power; innovators with access; and flexible resources to execute. Harford’s analogy is that in the Galapagos, an ecosystem isolated from the rest of the world, different flora and fauna developed. He equates the ecosystems in parts of the venture world to this phenomenon.  You can go to the World Policy Institute website, www.worldpolicy.org, and look for the Journal issue entitled “Innovation,” to read more about this. This topic is included in an essay by Neal Stephenson, a great Science-Fiction writer and an unusual contributor to this kind of publication. He lays out some challenges for those of us who exist on the portal between the real world and those imagined. A fun and stimulating read.

Well, while Europe and Asia are increasing their venture investing, in the US the VC industry is going through a contraction, which is a good thing for returns—maybe not for the planet.

The number of funds raising capital is down and the number of investments being made is down. By the way, I want to thank my friends at Knightsbridge Advisers for several of the next slides. Knightsbridge is a fund of Venture Funds with a specific and very successful focus developed over a long period of time on the top quartile venture funds in the US, many of whom now reach into Asia specifically.

Historically, stronger returns have followed these contractions. Fund Raising is down to its historically low percentage of stock market capitalization and there is not a great inventory of what has been historically defined as early stage capital.  These are metrics that should be tracked in any market.

And, the top quartile, which has consisted of the same VC funds for many years with only few exceptions, has substantially outperformed the rest of the industry.  These firms are their own Galapagos.  There isn’t enough history here, in India, to determine all the entrants into that top quartile. Some firms are beginning to stand out, but we need a couple more cycles to really tell who has staying power. We may be hitting one of those cycles here right now.

This is an important point. As I said, growth can cover up many sins. To paraphrase Warren Buffet or Mark Twain–“you have to wait until the tide goes out to see who is not wearing a bathing suit.”

Having said that, this takes nothing away from the opportunity here in India, fueled by significant growth.

There is a very fertile environment here for Value Creation. I would highlight three sectors specifically for India. IT, Life Sciences and CleanTech, all in the context of infrastructure development and increasing awareness and demands from the populace for what they see elsewhere in the world.

It starts with the Internet and expands to mobile apps and cloud computing. And, it is driven by increasing processing speeds. We are still in early days regarding the ongoing impact of Moore’s Law. Three weeks ago I attended a three-day Intel Capital conference on the west coast. Duron, is in the Intel portfolio and I was fortunate enough to join our CEO, Ajay Awasthi, at the conference.  200 of Intel’s portfolio companies and 400 Intel managers and technologists attended the conference. Over half the companies were from outside the US. This was a very exciting and stimulating conference. Intel will invest in any company meeting its return criteria that will lead to more chips being sold—that covers the range from the technology around chips to social media.  The most important news though was when Paul Otellini, the CEO, stated that Intel has 10 years of clear visibility on Moore’s Law.  I think that means within 10 years, processing speeds on a single chip will be at least 64 times faster than they are today.  I am not sure we can imagine all the possibilities, but with a sense of certainty around that happening we get very close to Neal Stephenson’s and William Gibson’s worlds.

A big factor in India is bringing basic health care to a broader segment of the population. I think integrated delivery systems will be a part of the solution here. Ultimately, improving outcomes and taking advantage of the IT developments on the horizon will change the nature of health care and create real value for those who participate.

The need to drive both energy independence and cleaner renewable energy creates enormous opportunities. I don’t think India can wait for grid build-out to satisfy its needs. Much of the grid that does exist is aged and outmoded. A leap to models with distributed power and low power products offers many opportunities. This is my bias, but I truly believe that the need for innovation here is critical to the survival of the planet.

I think there are several other asset classes or sectors in which the venture community can participate that have growth characteristics.  Let me give you that broader characterization as we bring this to a close:

I start with Infrastructure. I think this could turn out to be a growth market in the US but will surely continue to be so here. And any innovation that contributes to the more productive movement of goods, services, people or information should find a market. Water also falls under infrastructure. There isn’t enough of it in the forms needed. Quality improvement and more efficient usage are two big opportunities. That leads us to Energy where there are enormous opportunities relating to the technologies being used and the productivity and efficiency of use, some of which I discussed already.

For India, we should include Agriculture or Agritech as its own category. This ties back into infrastructure, energy, water and life sciences, but should be listed here as its own. IT and Health Care are the two other big categories already discussed. Education is a difficult sector because of all the stakeholders who want a say in how the structure evolves, but one where technology can play a significant role and is very important in India. In some ways this sector also ties back into Energy as available and dependable clean power may be one of the most important factors in improving and broadening the educational map in this country. I put Financial Services and Hard Assets here as well as selectively attractive classes. . I list Global as a separate Asset Class, although every class listed can be considered global as well as domestic. The point this emphasizes is that the true growth opportunities involve solutions that extend beyond any domestic borders and truly allow one to be innovating into growth.  None of this is easy.  Persistent performance requires much more than capital and some smart people. It requires the ecosystems that in many cases have taken years to create. Investing beyond just getting Beta to getting real Alpha in any investment class requires patience and the full use of all the resources one can bring to bear. We are at an interesting stage where the nature of the venture industry may be returning to its previous core. I think it is a very exciting time for venture investing–not that it isn’t always exciting.

There are multiple opportunities across multiple sectors globally. Innovation is occurring and the pace is likely to accelerate. India is clearly innovating into a growth market in spite of near term concerns. Experienced Venture Capitalists can make a significant contribution. Smart capital can and should be choosy in this volatile global environment.    But maybe, if one is careful, the next decade may turn out to be a period of great investments with a great benefit to all humankind. Let us hope so.

Neuberger Berman’s Rivkin Discusses India Investments (Audio)

Jack Rivkin, director of the Neuberger Berman Mutual Funds, discusses investment and growth in technology in India. Rivkin talks to Bloomberg’s Kathleen Hays on “The Hays Advantage” on Bloomberg Radio.

Download the podcast

Light and Life in Rural India

We spent two days in villages in the District of Udupi in the State of Karnataka meeting with our sales agents and visiting homes where the Duron Solar Home System was in use.  We were there with three of our investors who had already spent a day in Bangalore at our headquarters reviewing the business and now wanted to see the system in use in the field. We chose Udupi, since it was “only” a ninety-minute plane ride to Mangalore and another ninety-minute drive to the town. Most of the installations were within 30 minutes of the town itself.

The State of Karnataka is reasonably well electrified. One has to travel deep into the rain forests to find an area without wiring.  Almost all of our systems in this state are in homes with electricity from the grid.  However, because of the uncertainty of when power is actually available and the cost, the villagers are interested in alternative power sources.

The grid in this area gets its power from both hydro and coal-fired utilities.

In the dry season the hydropower is less available because of low water levels.  What is available from whatever source gets diverted to the industrial sector. These are usually scheduled diversions that occur when the light is most needed, i.e., when it is dark. In the monsoon season, which is just beginning, the grid itself has more power delivered to it, but the violence of the storms causes unscheduled outages from lightning or power lines falling, which can sometimes produce two or three days without power.

The alternatives are kerosene lamps, diesel generators, inverters drawing power from the grid when it is available and storing it in batteries, or alternative energy sources, primarily solar, tied into a battery and lighting system of some sort. The Duron system is one of the latter. Cost, reliability, maintenance and simple knowledge of its availability are the primary factors determining which alternative is chosen.  Kerosene lamps are ever present as the ultimate fall back when all else fails.

The visit, while terrifying and certainly rugged for us Westerners, was exciting and gratifying. I say terrifying, because any time one is on the narrow roads with all forms of traffic moving in all directions, the near-death confrontations of two or more vehicles and an occasional animal seem continuous and only Providentially resulting in no accident.  The ruggedness comes from the climate, the accommodations and the rural nature of where the customers are, combined with the uncertainty of the ultimate outcome of drinking all the chai and eating the snacks offered by the owners of each of the homes we visited.

The excitement and gratification came from seeing the diverse ways in which the system is changing lives. A few examples:

A young tailor keeps the solar panel, the power pack and one of the three LED lights that come with the system at his small, unelectrified shop at the intersection of two roads near his village. He sits in front of a pedal-powered Singer sewing machine of uncertain vintage, making and repairing clothing for his neighbors. The single light is used to extend his workday by two or more hours, increasing his income. When he closes up his shop, he locks the solar panel inside and brings the portable power pack home where he has the other two lights mounted for use by his children to study and his wife to cook.  He is probably a customer for a second system when the income from his increased business and the cost savings from using solar as his power source allow a purchase.

A woman living far away from neighbors and help tends her very sick sister. The two of them are the only occupants of the home. She says simply that she needs light for her sister all night. Kerosene is not healthy for her sister and not easily available to someone with no ready form of transportation to replenish it.  And the grid is not there when she needs it.  It doesn’t hurt that the system also has a cell phone charger, which does mean, in an emergency she has a working phone to reach someone.

A large family, living in a quite beautiful and well-kept 150-year-old home, has the three lights each installed above a desk that is used for reading and study by the children and probably some of the adults. This is a traditional home with electric lighting but much of what seems a throwback to an earlier era. The kitchen has a wood cookstove and there are many other traditional elements as well. The family can clearly afford more amenities, but I would surmise that they are savers, not spenders.  The placement of the lights in specific reading areas may indicate that the saving relates to the children and their educational opportunities. Solar lighting eliminates most excuses for not studying as well as ultimately saving money. Here, we were offered and ate freshly cut jackfruit. It would have been pleasant to spend an afternoon with the family, understanding more about their history and their current lifestyle. Our sales person had another important visit she wanted us to make, though.

This was our best sales person in the region—a senior member of a local self-help group with a personality and an element of persuasiveness that made her a natural Dale Carnegie graduate without having taken the course.  We were an out-of-place group of three Americans, three Spaniards, and two other senior Indian executives of the company. She felt it was an auspicious occasion. Our visit was to her temple. She was feeling very happy about having us there and wanted to perform a Puja (look it up) in thanks for the good feelings and the success she was having. It was quite an honor for us and clearly very important to her. As recognition of her success it certainly beat the classic over the top celebrations for the best producers that I experienced in my years in the financial industry. I will participate in a Puja every time I visit the area if it is the motivator of success for our producers.

These producers are changing their neighbors’ lives. The selling process has a bit of a feel of Avon calling, but the product lights up faces in a different manner.  What a wonderful experience.

Light in Varanasi

Varanasi is a very old, very holy city in the eastern part of Uttar Pradesh, India. Named after two of the rivers, Varanu and Assi, flowing into the Ganges, Varanasi, to me represents all of India. A drive through the city unveils all aspects of the country—modern cars, modern buildings, but in small proportion to the masses of hindus, muslims and others using every form of transportation; construction everywhere; the small shops which become dwellings at night; the cows, oxen, pigs, goats, dogs wandering on the streets and occasional monkeys on window sills; families of five on a motorcycle, with only the driver wearing a helmet; groups of seven or 8 in a three-wheeled motorized rickshaw. tuk-tuk or auto depending on the namer’s provenance; horns, the essential driving accessories, blaring as two lanes become 4 or 5. As one crosses the Ganges and heads toward the villages outside of the main city, the rural character of the country exerts itself immediately. Brick, wood, straw and mud homes in clusters sit adjacent to very dry rice fields with ¼ acre rectangles surrounded by 8 inch high embankments waiting the beginning of the monsoon season.
Last year the monsoon season arrived late producing a smaller first crop and lower incomes. This year the season is expected to start early—good for the farmers, not necessarily good for the primary purpose of our visit. We, http://www.duronenergy,com, are selling a solar home lighting system with three LED lights and a cell phone charger. Six to eight hours of sunlight or a charge from the grid when it is working, provides six to twenty hours of light at three locations, depending on the intensity of light needed. It can also power a fairly robust fan for several hours. With electricity from the grid undependable at best and kerosene in use where the grid doesn’t reach, some form of clean light is needed for safety, security, health and, maybe most importantly, education. Two hours studying under a kerosene lamp is all a child’s eyes can take—forget about the long term impact on his or her health.
However, while the next month is prime season for us, the approach of the monsoon season raises questions about whether there will be sufficient sunlight to charge the system. The need may be greater as school begins and the grid becomes even less reliable. But the sale is a bit tougher. We have a dealer network with shops in the small towns that the villagers come to for a variety of goods, but a solar system at 6000 Rupees is not a drop-in sale. So we have the equivalent of Avon ladies or Fuller Brush men going door-to-door and village-to-village occasionally accompanied by a marketing van—not too different from a traveling medicine show. We are not selling elixirs, but something a bit more tangible. We also, fortunately, have a regional bank with branches in most of the locations we are interested in. The government is providing the banks with incentives to finance alternative energy systems. Ours has been a hit with this bank. It helps that the distributor, who manages the dealer network, has worked with the bank to finance his other product line–three-wheeler motorized rickshaws using CNG as the fuel source. He is already selling a product that is more efficient, produces fewer emissions and provides a higher level of income to the buyers. He is excited about another alternative energy product. While the ticket on the rickshaw is higher, sales don’t occur every day. The solar home system, with the right support, will keep his dealers busy and substantially increase their income. As one can tell, this is early days on retail consumer durable distribution in India. Whoever cracks this nut has a big business.

A Local Problem or a Global Problem? The Monsoon Was Not Soon Enough.

India is now in the midst of its annual monsoon season. 80% of India’s rainfall occurs during this season and is critical to its agricultural system. However, in many places it started 3-4 weeks late.  Cumulative rainfall appears to be catching up, maybe now only 18-20% below normal in many places, 40% below normal in others. Daily rainfall is now running 50 to 80% above long term averages although June had the lowest cumulative rainfall in more than 80 years. In some spots, Uttar Pradesh (UP) being one, the lower rainfall is being characterized as producing “drought conditions.”  In a parochial sense, I care about UP.  Our company, DWP, sells solar systems to the farmers there (see on this blog, “600 Million Points of Light…”). A late start to the rain meant easier logistics selling in the area in June.  However, if this means lower plantings and shorter harvests—which it does—the farmers won’t have enough income to buy the systems later in the season. And, the price of certain foodstuffs will likely rise, further reducing spendable income. If this occurs countrywide—which is the case—it could mean demand for foodstuffs on the world market will rise as India tries to feed its people.

Maybe this is just one of those statistical events.  After all, the last four seasons have produced bumper crops in India. Or maybe, those climate change folks are right.  They have been saying that one manifestation of climate change could be changing weather patterns with shorter, but more intense “seasons.”  Some of them pointed to Katrina a few years back as an example of what could happen. Of course, that faded when the next year proved to be a mild hurricane season in the Atlantic/Gulf region. I will bet that some of them will point to this year’s monsoon season as supporting their case.  In any event, weather/climate will likely force India to add food shortages to its list of problems this year.

India is taking somewhat of a wait and see attitude on Climate Change—as are many people. If nothing else, India believes that the western world should not be asking it to reduce carbon emissions when the developed countries are the ones that have put most of the carbon into the system up to now. On one level India is right.  The western world needs to take some very aggressive steps to reduce its use of carbon. On another level, all the evidence says that India will likely suffer the most of any major country if global warming does occur—and there is some evidence that some of the effects of emissions are quite local.  In addition, moving countries toward energy independence and fueling (if you will pardon the expression) a new technological wave, it is possible that pro-active steps to reduce carbon emissions may actually save lives and add to economic growth. If I felt there was a significant risk to humanity from the carbon path we are on—and I do—and I could change my position geopolitically—which I also believe—I would be doing everything I possibly could as a country to be a major participant in this carbon reduction cycle. As I said in my first post on this blog, we may be 10 years away from a more universal recognition that we have a problem.  We are getting some early signals. How many do we need?

600 Million Points of Light—Thinking Outside the Grid

I just returned from two weeks in India, one week with a start-up company providing a low-cost lighting solution for the 600 million individuals with homes and shops that are off-grid. The other week involved a variety of meetings, mostly concerning NGOs in India, a visit to the Salt Pans in Gujarat and three interesting days in the Bandhavgarh National Park looking for tigers and learning more about the role the Parks play in India’s future. While we were in India, the last votes were being cast for members of Parliament, which in turn would determine the nature of leadership in a very critical period for India and the world.  For the first time in many years the voters, 400 million of them, kept the incumbent party, the Congress party, in power with a larger mandate than it had before. The Indian stock market had the biggest percentage gain, ever, of any major stock market in the world the first day of trading after the results were announced.

Many observations came out of this trip, some of which relate directly to the supposed focus of this blog and others less so.

Let’s start with one that does relate, Distributed World Power (DWP), the start-up company. Full disclosure: I am on the board of DWP, which is a portfolio company of Idealab. We recently relocated the headquarters from Pasadena to Ahmedabad where the first product is being manufactured.  It is a solar-charged power pack, with three LED lights and a cell phone charger. It sells for around $100 (~5000 Rupees).  It is currently being sold through a variety of distribution systems and financing schemes to a mixture of demographics in various parts of rural India. In India, the immaturity of distribution, financing and marketing to low-income rural customers presents a problem and an opportunity.  The problem is there is no standard model in which to slot a product.  The opportunity is if one can figure out the right model(s) for the right demographics—whatever they may be—the market is huge. The need is certainly huge: 600 million off-grid with the rest on unreliable grid. This was brought home traveling through different villages, on-grid and off, in Uttar Pradesh, one of the most densely populated and least developed states of India.

At night, in an off-grid neighborhood of 70 homes, it is dark, with 4 points of light visible as one looks over the setting. Three are compact fluorescents  (cfl) hooked to small automobile batteries.  At each cfl house the light is hanging in a sheltered dirt floor area, outside the home, which one could call a “patio.” There are 9 to 11 women seated around a table doing embroidery to be sold in the local markets. The houses themselves are dark. An occasional kerosene lamp provides a small glow in an alcove inside a home. Every two days someone must carry each of these batteries 4 kilometers to be charged by a diesel generator at a cost of 11 or 12 rupees. In some villages the walk is to a point connected to the grid for recharging, although there is no guarantee that the grid will be carrying electricity at the time one arrives. In either case there is the walk to, the wait while charging and the walk back with the battery.  The fourth point of light in this village is a  “Duron,” the brand name of the DWP system.  A LED light is mounted at the entrance, lighting up the patio. Another is mounted in the main room, and a third in a bedroom or, more accurately, a dormitory.  A six to eight hour solar charge provides 4 hours of bright illumination from the three lights or 8 hours of partial illumination, or some combination thereof. Bright illumination from these three LED lights is about 570 lumens, equivalent to a 50 watt bulb, but with greater lux or intensity.

As we traipsed around the village, asking questions of the various light owners, a crowd gathered, followed us and carried on a community discussion including questions to our distributor in that area. He closed another sale that night. The system was delivered and installed the next day. I suspect there will be other sales there until about 20% of the neighborhood has lights. If the right financing scheme can be found, maybe all the homes will have light. And then, maybe all the 30 neighborhoods in the village. And then, maybe all the 70,000 villages in Uttar Pradesh.

There are calculations that justify purchases, but little value is put on time, labor or periodic outlays. The shopkeepers can make an easy calculation: more light, more people, more hours open, more sales. For a homeowner, it is not yet easy. There is a value put on education. In another village we talked with the younger brother of the owner of a Duron about how his life had changed since the purchase. He said he now studied two to three times as long as before, three hours in the pre-dawn morning and three in the late evening under one of the LEDs. Previously, he had studied under a kerosene lamp until the wind blew it out or his eyes were burning—usually about two hours.  We know there was some truth to what he told us as he had called the distributor the morning before at 6 am saying he was having trouble charging his cell phone, something he did every few days while studying. It turns out he simply hadn’t pushed the plug in far enough this time. He said he was doing better in school and now liked school–an ambitious young man with a better chance to achieve his ambitions.

These stories and others as we traveled around were quite heartening.  The quality of life improvement, the educational element, the individual economic gains made one feel good about being in the business. Maybe, as importantly, the potential to build economic value at DWP, or other companies like it, was so apparent. Not an easy task, but very likely achievable.

There was also the reinforcement and exposition of an observation made by a young friend as we were walking around the streets of Mumbai, picking our way past torn-up pavement and demolished front yards. He said, “India must skip the classic infrastructure build expected of them. They have to find another way.  Otherwise they will never bring all the country up to developed world standards and achieve true participation in the 21st century. They did it with cellular phones. Why not with other basic systems?” At the time, I felt it was a nice thought but one without an implementable set of solutions. In retrospect, having spent time in various parts of the country, I thought maybe it could be done—at least in power.  The capital and operating expenses of most alternative energy systems, ex nuclear, are approaching the point where scale is less necessary to achieve cost-of-power parity with fossil fuels. Why not skip the build-out of the grid and the behemoth power plants and install specific-point power facilities.  This can range from a Duron to a solar, wind or hydro facility, or some combination thereof, for a single home, a plant, a village or a town. Power storage is still an issue, but being solved.  Think about the emissions improvement from such an approach. Think about the shortened time frames if private enterprise provides the solutions into a local bureaucracy as opposed to a state or national one.

I haven’t spelled out a complete answer here.  That may best be left to the entrepreneurs.