Nassim Nicholas Taleb on Accepting Uncertainty, Embracing VolatilityPublished : December 17, 2012 in Knowledge@Wharton

The day before a big game, regardless of the sport, a team's coach or starplayer is often asked, "How will you stop the opposing team tomorrow?"The answer typically goes something like this: "We can't worry about theother team. We just have to play our game."

That, in a very simplified nutshell, is the essence of Nassim NicholasTaleb's highly polemical, always thought-provoking new book, Antifragile:Things That Gain from Disorder. Here, though, the opponent is not anotherteam's slugger, quarterback or point guard, but the future and change. Thedefining characteristic of future change, according to Taleb (who continuesa line of argument developed in previous books like Fooled by Randomness and The Black Swan), is that it is impossible, and foolhardy, to try to predictit. Instead, the author argues, it is essential to make peace with uncertainty,randomness and volatility. Those who do not -- who insist not only ontrying to predict the future, but also on somehow trying to manage it -- hedisparagingly calls "fragilistas."

Antifragile is divided into seven sections that Taleb calls "books." In aprologue, he explains that each is, in a sense, a long personal essay, "mixing autobiographical musingsand parables with more philosophical and scientific investigations." The author introduces fictionalcharacters such as Fat Tony, who epitomizes the straight-talking "street" knowledge of the practitioner asopposed to the fragilista. In addition to "fragilista," he coins or adopts a number of other terms; delvesinto extended asides on Greek philosophy and mythology; and in general fashions a thoroughlyidiosyncratic approach to his subject matter. The result is a work that is readable and entertaining, if attimes a bit unwieldy.

A Future We Can't Predict

Taleb advocates what he calls "nonpredictive decision making" focused on the ability of the unit inquestion (whether that be an individual, institution, industry or society) to withstand unexpected change.Yet to simply survive is not enough. Taleb is interested in things that actually thrive on uncertainty. Tomerely avoid harm is, in his terms, to be robust -- and at times this is an acceptable result. Robustnessfalls in the middle of a continuum he calls The Triad. At the far left is fragility -- that which requirestranquility, certainty and predictability -- and at the far right, in the absence of a better word for it, is antifragility.

Antifragility, it should be pointed out, doesn't mean that volatility will always be experienced positively. Itsimply means that the antifragile has more of an upside than downside from random events. As Talebnotes, "Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness,disorder, and stressors and love adventure, risk, and uncertainty."

Another sports analogy, one Taleb himself uses, effectively illustrates the idea of benefiting from shock.When we go the gym and lift heavy weights (barbells later become a key image in the book), weintentionally apply stress to our body. Muscle tissue is strained and even broken down. The body'sresponse is to overcompensate to the trauma and emerge stronger than before. This process ofoverreaction to stress and setbacks, the author argues, is intrinsic to our very being, to all of evolution, tonature and to every human system that has survived. It is the process of life itself. The reverse holds trueas well: Remove stress from a system, and that system grows weak; it becomes fragile. Stay in bed forthree weeks instead of lifting weights, and muscles atrophy.

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The Cat and the Washing Machine

A key distinction for Taleb is that between the organic and the mechanical, and the title concept is centralto this. Organic entities are intrinsically antifragile, while artificial creations are at best robust and likelyfragile. The split corresponds roughly, but not entirely, to the living and the non-living. Taleb argues thatcertain man-made things like ideas, technologies, businesses and even the economy operate more byorganic principles than mechanical ones: "They are closer to the cat than to the washing machine but tendto be mistaken for washing machines."

Nature and natural systems are an ongoing reference for Taleb -- not just as illustrative analogies, but aspart of the very fabric of his worldview. For him, nature is the ultimate model for how to deal withuncertainty. Nature does not need to predict the future in order to deal with its unexpected turns. Theinformation volatility provides is digested and adapted as part of the evolutionary process. In this sense,nature "loves small errors."

Nature is also not "safe." It accepts short-term loss for long-term gain. For example, Taleb cites thenatural cycle of forest fires that clear the forest of highly flammable material and weed out weak andvulnerable growth. Suppressing these fires artificially (i.e., suppressing volatility) imposes a falseshort-term stability while increasing long-term risk. We get fewer fires but more devastating ones. Thisbasic principle can be applied to human systems as well. Government bailouts that prevent certainbusinesses from going under, for example, only increase the possibility of system-wide collapse. Errorand failure, Taleb insists again and again, are essential sources of information as long as they are limitedand localized. Every plane crash brings us closer to safety. Attempts to eliminate error and volatility willbackfire in the long run. Paradoxically, there is no long-term stability without short-term volatility.

Black Swans

A concept Taleb developed in a previous book, Black Swans are game-changing, world-altering events hecontends are the driving force in history. Though they are impossible to predict, fragilistas (especially thepolicymakers and academics Taleb loves to ridicule) make the mistake of trying to impose a clearnarrative on them in retrospect. With that narrative in place, they tell themselves the Black Swan couldhave, and perhaps should have been, anticipated, and they set about trying to successfully predict the nextone. For example, events in the Middle East that have caught the U.S. government by surprise (such asthe 2011 Egyptian uprising or the 1979 Islamic Revolution in Iran) are labeled "intelligence failures." Thesolution, according to fragilistas, is simply better forecasting.

This approach misses the point, which is to assess the fragility of a system, not the particular event thatwill expose that fragility. In a discussion of the earthquake and tsunami that produced the 2011Fukushima nuclear disaster in Japan, Taleb writes: "Not seeing a tsunami or an economic event coming isexcusable; building something fragile to them is not." And in the case of the Fukushima disaster,authorities seem to be responding appropriately: not by developing better predictive models, but bybuilding smaller and less vulnerable reactors.

It is important to point out that Black Swans are not always negative, destructive events. The explosion ofthe Internet and the rise of Google are examples of positive Black Swans. What cultivating antifragilitydoes, Taleb says, is enable us to minimize the potential harm from negative Black Swans while capturingthe benefits of positive ones. It is all about developing a productive and flexible relationship withvolatility.

Nonetheless, the dominant impulse among policymakers and so-called experts is to try to reducevolatility, rather than deal with it more productively. These fragilistas overestimate the reach of scientificknowledge and the possibilities of human control. Intolerant of the messiness of trial-and-error volatility,they avoid small errors and the essential feedback those errors provide. The end result is to createsomething that is steadier and more predictable, but fundamentally fragile. Risks are hidden andsuppressed, and the stimulation of randomness and stressors is denied. But the effort to avoid smallmistakes and minor pains makes larger ones more severe. Ironically, the imposition of false stability withthe intention of avoiding Black Swans makes them more likely and more dangerous.

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Narrowly, the fragilista is marked by a preoccupation with theory, risk assessment and strategic planning-- all of which Taleb disdains. More broadly, the fragilista is symptomatic of the fundamentalshortcomings of modernity, which the author defines as "humans' large-scale domination of theenvironment, the systematic smoothing of the world's jaggedness, and the stifling of volatility andstressors." Modernity has made a religion of rationalism, optimization and efficiency. By contrast, Talebinvokes Nietzsche and his embrace of the "Dionysian": the "dark, visceral, wild, untamed, hard tounderstand."

Knowledge and Practice

Epistemology, the inquiry into the nature of knowledge, is a central concern for Taleb, and an eminentlypractical one as opposed to a theoretical one. In a world ruled by uncertainty and unpredictability, and inwhich precise causes are impossible to isolate, abstract and theoretical knowledge is of limited use. Hisown encounter with these limits came when, as a recent graduate of business school and then the recipientof a doctorate in management science, he did a stint on a foreign exchange trading floor. The professionaltraders he worked with had no background in theory, and they didn't read economic reports or forecasts;they simply had a nose for when to buy and when to sell. They knew what worked; they didn't need toknow why.

Ever since, Taleb has had a deep respect for practitioners as opposed to theorists. Real, usable knowledgeemerges from doing, not studying. Technology is often described as the application of scientificknowledge to practical projects, implying a hierarchy with priestly "science" on one level and mere"practice" far below. Taleb lists numerous examples in the development of technology, and medicine aswell, demonstrating how theory and knowledge emerge from practice, not the other way around. Keyadvances grow organically (and sometimes randomly) from individuals the author likes to call "tinkerers"engaged in hands-on trial-and-error experimentation.

Accordingly, Taleb embraces the apprenticeship model of learning as opposed to the academic model. Hedoesn't oppose formal education, but says its purpose should be learning for learning's sake, and thateducation should not be justified as an engine of economic growth. He cites studies by economists whocall into question an assumed causal link between education levels and productivity. Instead, he argues,wealth and economic growth eventually result in good education systems.

The logical conclusion of Taleb's preference for practice over theory is to question the classical Socraticideal of truth in the first place. Being right, knowing how to define things, understanding the differencebetween what is true and false: None of this is the point. What is important is to understand the results ofevents, not the events themselves. An even deeper implication of this approach is that real intelligencelies not in the individual, but in the evolutionary process -- the ongoing process of trial-and-error. In thisprocess, he argues, options (essentially, the freedom to experiment with uncertainty) can be moreimportant than knowledge or information. Options allow you to benefit from the feedback trial-and-errorprovides. And knowing how to apply that feedback to future decisions can be the highest form ofwisdom: "wisdom in decision making is vastly more important -- not just practically, but philosophically-- than knowledge."

Medicine and Barbells

The practice of modern Western medicine is a topic of great interest to Taleb in its own right. But it alsoprovides him with a set of clear examples of the perils of the fragilista's tendency toward what he terms"naïve interventionism." This is a category of intervention that produces small (or no) visible gains, whilecreating the possibility of large (but often not immediately visible) harm. Examples include statin drugs totreat high cholesterol (where fifty patients have to be treated, at uncertain cost, to prevent a singlecardiovascular event) and annual mammograms for women (which actually increase all-cause mortalityfor the test group).

In opposition to this approach, the author cites the part of the Hippocratic Oath that cautions, "First, do noharm." Unfortunately, the pervasiveness of professionalization in our society creates a bias towardintervention -- in other words, the restraint of inaction is not likely to be rewarded. Nonetheless, inmedicine and other areas, he asserts that the first rule should be to "avoid interference with things we don'tunderstand," which, in Taleb's view, covers a lot of ground.

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Taleb is a fan of barbells as an exercise tool. But he also uses the image to convey the "bimodal" approachhe suggests is the best way to deal with uncertainty and cultivate antifragility. In keeping with the imageof the barbell, the idea is to avoid the wishy-washiness of the supposed "Golden Middle" and insteadconcentrate on two contrasting but complementary strategies: extreme risk aversion on one side, andextreme risk loving on the other. For example, in the area of personal investment, you might invest 90%of your funds in something as radically safe as cash, while putting 10% toward extremely high-risk,high-reward investments. Your maximum loss would be capped at 10% of your assets, whereas putting100% of your assets in so-called "medium" risk securities carries a danger of losing everything. Strive tobe 90% accountant, 10% rock star, Taleb cheekily suggests.

He applies this model across a variety of arenas. For example, in medicine, we should treat the healthy ornear-healthy with an extremely conservative, less-is-more approach, while treating the seriously ill muchmore aggressively. In socio-economic policy, it would imply aggressive intervention for the very weakwhile letting the very strong alone -- in contrast to the current policy of focusing on the creation of minorgains for the middle class.

Skin in the Game

For Taleb, the barbell is a tool for engaging risk and uncertainty in a way that is both responsible andvigorous. He praises those who take risks, whether they be entrepreneurs or poets, as adventurers anddoers essential to the continued evolution of society and the economy. At the other end of the spectrumare those who talk or act without any risk or exposure. Taleb has nothing but disdain for policymakers orpundits who enter the fray of public policy without any personal stake in the issue at hand. They have no"skin in the game," as he likes to put it.

In a final section devoted to the ethics of fragility and antifragility, Taleb laments that this kind ofdisconnect between influence and personal risk is only growing: "At no point in history have so manynon-risk-takers, that is, those with no personal exposure, exerted so much control." Here, the author takesthe gloves off and names names -- with columnist Thomas Friedman and economist Joseph Stiglitzamong those singled out. Taleb is particularly troubled by corporate managers who don't own thebusinesses they run. They have incentives (bonuses) without disincentives (penalties), upside withoutdownside. Robert Rudin, for example, earned nearly $120 million in bonuses from Citibank, but sufferedno personal consequences when the bank collapsed and required a multi-billion--dollar governmentbailout.

Taleb characterizes this as essentially a "transfer of antifragility," with certain individuals exertinginfluence without cost (remaining antifragile) while others bear the consequences (increased fragility).Such a transfer is, he asserts, a kind of theft, and it raises a profound ethical question, perhaps thedominant one of our time. Somehow, he writes, we have to "make talk less cheap."

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Connecting the dots December 12, 2012

INVESTMENT MANAGEMENT

Simhavalokana

As we bid adieu to the year 2012, it is time for our very own form of Simhavalokana. Wildlife enthusiasts, or should we say Indian philosophers, may well know the fact that as the lion walks some distance in the jungle, it looks back to examine the path it chose and how it covered that distance. Th is retrospective glance in Sanskrit is known as Simhavalokana.

It is human nature to obsess about the future. We don’t blame market forecasters for being pre-occupied in attempting to look at the crystal ball while trying to predict index targets for 2013. After all Charles Kettering1 once said, “My interest lies in the future, because I am going to spend the rest of my life there”. However, as lifelong students of the stock market we think it is as important to refl ect on the year gone by, as it is to try to make forecasts. We often get so absorbed in the daily noise surrounding investing, that we tend to forget the importance of refl ective Simhavalokana. In this year-end edition of Connecting the Dots, we make an attempt to summarise ten lessons learnt from the markets in 2012.

1. Market timing is dangerous

As investors, our holy grail for generating alpha is to look for through-cycle winners, who we call Th e Dependables (refer CTD: Th e Dependables). We don’t categorise stocks or sectors as defensives or cyclicals, but rather as those with dependable growth and capital allocation characteristics versus those without. We think market timing is a dangerous game and in 2012 we refrained from trying to time the market by avoiding tactical trades in high beta stocks in anticipation of a rally.

As Vitaliy Katsenelson2 said, “It is hard if not impossible to create a successful market timing process. Aside from the fact that it demands that you be correct twice – when you buy and when you sell – emotions are in the driver’s seat of the market especially at the tops and bottoms”.

Amay Hattangadi

Executive DirectorPortfolio Manager, Morgan Stanley Growth Fund

Swanand Kelkar

Vice President

Portfolio Manager, Morgan Stanley Growth Fund

1 An American inventor, engineer, businessman, and the holder of 186 patents; Credited with the invention of the electric motor.

2 The Little Book of Sideways Markets by Vitaliy Katsenelson.

Simhavalokana

2 |

2. Don’t let the consultants dictate

We are wary of investing in companies whose senior managers tell us that they relied on consultants’ advice before taking strategic decisions. Th e same applies to our business of investing. While intuitively we always felt India was the most over-researched market in the world, we recently stumbled across a very interesting statistic. Th ere are only 51 stocks in the world that are rated by more than 50 sell-side research analysts. Of these 49 are in India. Th e only two stocks outside India are Apple and Intel. We will listen to the army of consultants, but do our own bidding.

Display 1: Research coverage of Indian stocks by sell side analysts

Number of analysts rating the stock Number of stocks

60 and more 20

50 to 60 29

30 to 50 61

10 to 30 161

Less than 10 307

Total stocks researched in India 578

Source: Bloomberg.

3. Read the odds

Investing is all about understanding starting point expectations, reading the odds and then making your bet. In our edition of CTD: Great Expectations, we looked at how expectations play an important role in investing. A great company might not always be a great stock if the embedded expectations are going to be diffi cult to meet.

Display 2: Stock price volatility of a leading IT sector company on the day of announcement of quarterly results

Quarter Revenue Growth (USD) Stock price movement on the day of announcement of quarterly result

Expected Actual

Dec-10 7.0% 6.0% -5.1%

Mar-11 3.5% 1.1% -9.6%

Jun-11 5.0% 4.3% -4.4%

Sep-11 5.4% 4.5% 7.0%

Dec-11 3.4% 3.4% -8.4%

Mar-12 1.0% -1.9% -12.9%

Jun-12 0.0% -1.1% -7.8%

Sep-12 3.5% 2.6% -5.5%

Source: CLSA, Bloomberg, Company data

4. Know who you are

Adam Smith3 famously said, “If you don’t know who you are, the stock market is an expensive place to fi nd out.” It is important to defi ne what you will and won’t do and stick to that discipline. Any attempts to chase momentum in 2012 led to investors getting whipsawed. We had our gut wrenching moments too. Morgan Stanley Growth Fund had a turbulent start to the year when markets saw a seven week risk-on rally. We stuck to our philosophy and were eventually rewarded as is evident from Display 3.

Display 3: Year to Date (YTD) Morgan Stanley Growth Fund Alpha relative to BSE 100 Index (bps)

Source: Bloomberg, Morgan Stanley Research. The returns are not annualised. Data as of Nov. 30, 2012For Performance disclosure, please refer to our monthly Fact Sheet on our website.

5. You can’t win everyday

Like any investor, we often rue the stocks that we miss but console ourselves with the thought that even the greatest of investors don’t make money everyday or on every bet. It is important to remember that you can’t win 5-0 against the markets, a score-line of 3-2 is good enough to win this game, if you have sized the bets well.

3 The Money Game by Adam Smith (George Goodman)

-800

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12

-600

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Simhavalokana

| 3

Display 4: Top performers from BSE 100 as of Nov. 30, 2012

Company Name YTD Returns %

United Spirits 305.6

HDIL 111.8

Godrej Consumer 90.9

IDFC* 88.6

Yes Bank* 85.4

IndusInd Bank* 85.3

Source: Bloomberg. The returns are not annualized.

*Stocks owned in MSGF Portfolio as of Nov. 30, 2012.

6. High quality - Necessary but not suffi cient

Buying high quality stocks purely because they meet all the criteria of quality is not the only consideration in building a good portfolio. If growth characteristics and valuations of these stocks are not supportive, they may not outperform, as the re-rating to factor for quality might have already played out. For the stock to sustain outperformance, it needs to score well on all the three facets – quality, growth and valuations.

In the chart below we compare two companies in the consumer sector – stock A is a company that the markets did not put on the same pedestal as stock B which was considered the gold standard in quality. If you compare the relative performance of both stocks over the year it is evident that stock A was re-rated as the underlying fundamentals were stronger, whereas stock B had a slowdown compared to its own historical track record.

Display 5: High quality – Necessary but not suffi cient

Source: Bloomberg

7. Be Patient

Market in its own style tests the patience of investors. At any point of time, there will be stocks in the portfolio that are not fi ring. It is important to be patient here, ensure that your original rationale is being borne out and then wait for the story to play out. It is almost impossible to perfectly time stock purchases and sales. We usually work with much lower churn ratios than the average of our peer group, as we think high portfolio turnover rates eat into portfolio returns and investors miss the big stock moves if they trade too frequently.

Display 6: Patience paid off in the media sector in 2012

Source: Bloomberg

8. Mean reversion is never automatic

Investors show signs of impatience when a sector outperforms or underperforms for a few months. Th ey start believing that markets should mean-revert and start itching to sell the winners and buy the losers. It is diffi cult for us to buy or sell stocks and sectors based on the sole rationale of divergent relative valuations. Mean reversion does not happen unless supported by an underlying change in dynamics. More importantly, trends can last for longer than you expect, as is evident in Display 7.

80

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90

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130

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150

Stock A Relative to BSE 100 Stock B relative to BSE 100

90

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12

100

110

120

130

140

200

4 months of no returns but wekept the faith

160

170

180

190

150

A Stock from Media Sector

Simhavalokana

4 |

Display 7: Cyclicals vs. Defensives

Source: Company data, MSCI, Credit Suisse estimates

Note: As per Credit Suisse, “Defensives” include Consumer Staples, Telcos, Utilities and Healthcare. “Cyclicals” include Energy, Materials, Industrials, Consumer Discretionary and Technology.

9. Don’t gamble

Market participants often spend disproportionate time and eff ort in trying to predict binary events. Th ese range from trying to guess when the Government might announce subsidy reduction measures to forecasting M&A activity. We resisted the temptation of participating in binary events such as chasing stocks on the back of rumoured M&A in the airlines and liquor sectors. While hindsight vision is a perfect 20-20 and some of these “event plays” might seem like misses in our portfolio, writing a convincing rationale without factoring in the event would have been diffi cult for us.

10. Bad Macro ≠ Bad Stock returns

Market indices are up 30%4 this year as this edition of Connecting the Dots goes into print. If we look back at all the gloomy economic commentary at the beginning and through most of the year it would have been almost impossible to predict such respectable returns. Year to date, India is among the best performing markets in the world. Amongst the 45 countries included in the MSCI All Country World Index, India this year ranks at #5 in US Dollar performance. So while macro factors play an important role in defi ning the regime in which companies operate, it is incorrect to give up on a country just because its macro environment is challenged. We strongly believe that despite the macro vulnerabilities, India’s allure for investors lies in the bottom up micro stories.

Display 8: Strong markets despite slowing GDP Growth

Source: CEIC, FactSet, Morgan Stanley Research

We recently watched the movie Life of Pi5 and it set us thinking about the deeper philosophical message from a seemingly simple story. Th e protagonist who goes by the nickname Pi survives a shipwreck on a boat with a Bengal tiger. After narrating his bizarre, almost implausible story, he says to the doubting offi cials who are investigating the shipwreck, “I know what you want. You want a story that won’t surprise you. Th at will confi rm what you already know. Th at won’t make you see higher or further or diff erently.” He then tells an alternate, far more gruesome and tragic story about his survival. Even the hard-nosed offi cials in the end believe the fantastic yet happy narrative. Isn’t the India story similar? While the problems are well known, we need to dream of a story that does not confi rm what we already know. In a year where doubt and skepticism abound, the Indian markets are likely to end 2012 at the top of the heap. While there are multiple excuses for not investing in the market, we continue to believe that a well-constructed portfolio can give decent returns. Investors need to choose what they want to believe. As Pi says “To choose doubt as a philosophy of life is akin to choosing immobility as a means of transportation.” Happy investing.

5 The movie Life of Pi is based on a book by the same name by Yann Martel.

5.0%

Dec-11 Mar-12 Jun-12 Sep-12 Nov-12

5.2%

5.4%

5.6%

5.8%

6.0%

6.2%

90

95

100

105

110

115

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Nifty (Indexed to 100)-RSQuarterly GDP Growth (y-o-y)-LS

-7.0

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

-6.3x

-4.0

-5.0

-6.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

India Trailing PB - Cyclicals less defensives

4 YTD return for BSE 100 as on December 6, 2012

www.jpmorganmarkets.com

Asia Pacific Equity Research14 December 2012

India Equity StrategyThe Policy Reform Road - A Good Start

Indian Equity Strategy

Bharat Iyer AC

(91-22) 6157-3600bharat.x.iyer@jpmorgan.com

J.P. Morgan India Private Limited

Bijay Kumar, CFA(91-22) 6157-3586bijay.kumar@jpmorgan.com

J.P. Morgan India Private Limited

Gunjan Prithyani(91-22) 6157-3593gunjan.x.prithyani@jpmorgan.com

J.P. Morgan India Private Limited

Emerging Market Equity StrategyAdrian Mowat(852) 2800-8599adrian.mowat@jpmorgan.com

J.P. Morgan Securities (Asia Pacific) Limited

See page 4 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

! Combating accusations of “policy-paralysis” over the last two years, the Government has made a decisive comeback on the reforms front over the last quarter. Zest for reforms has also been backed by some shrewd political maneuvering. Policy initiatives have been the key driver for Indian equities performance over the last quarter. A revival in growth is expected to be gradual implying that the policy developments will continue to be the key driver for market performance over the near term.

! What’s been achieved so far? Key policy initiatives since September are: 1. Increase in Diesel price and capping the number of subsidized LPG cylinder per family per year to six 2. Increased FDI limit in multi-brand retail (51%), Aviation (49%) and Broad casting (74%) 3. Cabinet approvals– Companies bill, Insurance & PFRDA bills, Land acquisition bill, Cabinet Committee on Investments, Urea Investment Policy 4. Roadmap on Direct Cash Transfers 5. Reduction in withholding tax on Corporate bonds 6. Resolving 2G spectrum pricing and auction 7. SEB debt restructuring 8.Rajiv Gandhi Equity Savings scheme to encourage retail investor into Indian equities.

! What to expect? Parliamentary approval is required for Insurance, PFRDA and Companies Bill. More importantly, the real progress on Cabinet Committee on Investments, Land Acquisition Bill and GST (Goods and Services Tax) are extremely important for attaining higher growth trajectory.

! Implications for Indian equities. Despite the recent sharp rally, current market valuations are not reflecting any irrational exuberance. Our base case expectations are for Indian equities to deliver returns of 12-15% over the next year driven primarily by earnings growth. Momentum on reforms sustaining would open up the possibility of increased returns as the markets re-rate further.

Figure 1: MSCI India - 12 M Forward PE

Source: MSCI, Datastream

8

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Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

BSE Sensex

Source: Bloomberg (rebased performance).

MSCI India relative

Source: MSCI, Bloomberg

9095

100105110115120125

Nov 11 Feb 12 May 12 Aug 12 Nov 1

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rel to EM

rel to APxJ

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Asia Pacific Equity Research14 December 2012

Bharat Iyer(91-22) 6157-3600bharat.x.iyer@jpmorgan.com

Policy Reforms: The Course Ahead. Combating accusations of “policy-paralysis” over the last two years, the Government has made a decisive comeback on the reforms front over the last quarter. Zest for reforms has also been backed by some shrewd political maneuvering. Policy initiatives have been the key driver for Indian equities performance over the last quarter. A revival in growth is expected to be gradual implying that the policy developments will continue to be the key driver for market performance over the near term.

Key policy initiatives / achievements since September 2012 are:

1. Increase in Diesel price and capping the number of subsidized cylinder per family: Diesel prices were increased by Rs 5 per liter, amounting to an 11% increase over the current price, effective from September 14. Also, the number of subsidized cooking gas cylinders that each family can avail has been capped at 6 per year. These measures are expected to reduce the fiscal deficit by a marginal ~ 0.1% of GDP.

2. Increased FDI limits. Foreign Direct Investment limit has been increased to 51% in multi-brand retail. This was an extremely contentious political issue and involved voting in both the parliament houses. Additionally, the CCEA (Cabinet Committee of Economic Affairs) approved a proposal that allows foreign-airlines to own up to 49% stake in India’s domestic carriers, increased FDI limits from 49% to 74% in the broadcasting sector, and introduced FDI into power exchanges.

3. Cabinet approvals: Companies’ bill, Insurance & PFRDA bill and Land Acquisition bill have been approved by the Cabinet but parliamentary approvals are required for these bills. Urea Investment Policy and Cabinet Committee on Investment don’t need parliamentary approval.

a. Companies’ bill’s objective is to modernize the structure for corporate regulation in India and also to promote better governance practices.

b. Higher FDI limit in Insurance (proposed 49%) & Pension Funds (in-line with Insurance sector) are expected to bring foreign capital and global expertise in these sectors.

c. Land Acquisition Bill aims to define an equitable framework for the compensation, resettlement and rehabilitation for land acquisition. The details are going to be debated in the parliament.

d. Cabinet Committee on Investment (CCI) has an objective of de-bottle necking key impediments in large projects (above Rs. 10 bn). The Committee is expected to oversee implementation of projects on a continuous basis.

Government has taken a number of policy initiatives to reviveeconomic growth momentum over the last three months.

3

Asia Pacific Equity Research14 December 2012

Bharat Iyer(91-22) 6157-3600bharat.x.iyer@jpmorgan.com

e. Urea Investment Policy is expected to incentivize fertilizer firms setting up new plants and expanding existing capacity. India imports over 30 per cent of urea requirement and the policy aims at reducing that.

4. Roadmap of Direct Cash Transfers. Direct targeting of subsidies has been one of the focus areas for this government towards fiscal consolidation. The Finance Minister shared details of the cash transfer of subsidies starting 1st of January 2013. The rollout is expected to start in 51 districts across states in India. The key criterion of district selection was districts with over 80% UID (Aadhaar) coverage. There are 29 schemes of various ministries –HRD, Women & Child Welfare, Minority Affairs, and Labor etc. – which have been short-listed for the cash transfer.

5. Reduction in withholding tax on corporate bonds. Withholding Tax has been cut from 20% to 5 % for all foreign loans, ECBs and FCCBs. This is the tax retained by the corporate and paid to the Government from FII/ NRIs payout. Earlier in March this year, the tax rate was reduced from 20% to 5% for select sectors only - power, airlines, roads and bridges, ports and shipyards, affordable housing, fertilizer and dams.

6. Resolving 2G spectrum pricing and auction. Telecom sector has been oneof the key victims of regulatory uncertainty. The recently held 2G spectrum auction has reduced the regulatory overhang to some extent.

7. SEB debt restructuring. The Cabinet Committee on Economic Affairs (CCEA) approved restructuring of Rs 1.9 lakh crore debt of state electricity boards. The move is expected to benefit the lenders and power companies in the long-term if discipline is maintained. As per the scheme, 50% of the short-term outstanding liabilities would be taken over by state governments and balance 50% would be restructured by providing moratorium on principle and best possible terms for repayments. Additionally, SEBs are expected to reduce their deficit in a phased manner through timely hikes in electricity tariff and reducing T&D (Transmission & Distribution) losses.

8. Rajiv Gandhi Equity Savings scheme. Under this scheme, a one-time deduction for income tax purposes will be available to a “new retail investor.” The new retail investor will be eligible for a deduction on the actual amount invested in ‘eligible securities’ in the first financial year, subject to maximum deduction limit of Rs 50,000. Eligible securities will include equity shares falling in the list of equity declared as “BSE-100” or “CNX-100”; equity shares of public sector enterprises that are categorised as Maharatna, Navaratna or Miniratna by the Central Government.

The Road AheadDespite the recent sharp rally, current market valuations are not reflecting any irrational exuberance. Our base case expectations are for Indian equities to deliver returns of 12-15% over the next year driven primarily by earnings growth. Momentum on reforms sustaining would open up the possibility of increased returns as the markets re-rate further.

Sentiment in financial marketshas improved but bottoming out of growth and the pace of recovery remains uncertain as of now.

Manufacturing the future: The next era of global growth and innovation

McKinsey Global Institute

1

A decade into the 21st century, the role of manufacturing in the global economy

continues to evolve. We see a promising future. Over the next 15 years,

another 1.8 billion people will enter the global consuming class and worldwide

consumption will nearly double to $64 trillion. Developing economies will continue

to drive global growth in demand for manufactured goods, becoming just as

important as markets as they have been as contributors to the supply chain. And

a strong pipeline of innovations in materials, information technology, production

processes, and manufacturing operations will give manufacturers the opportunity

to design and build new kinds of products, reinvent existing ones, and bring

renewed dynamism to the sector.

The factors we describe point to an era of truly global manufacturing

opportunities and a strong long-term future for manufacturing in both advanced

and developing economies. The new era of manufacturing will be marked

by highly agile, networked enterprises that use information and analytics as

skillfully as they employ talent and machinery to deliver products and services

to diverse global markets. In advanced economies, manufacturing will continue

to drive innovation, exports, and productivity growth. In developing economies,

manufacturing will continue to provide a pathway to higher living standards.

As long as companies and countries understand the evolving nature of

manufacturing and act on the powerful trends shaping the global competitive

environment, they can thrive in this promising future.

The McKinsey Global Institute undertook the research and analysis that follows

to establish a clearer understanding of the role of manufacturing in advanced and

developing economies and the choices that companies in different manufacturing

industries make about how they organize and operate. We started with an

examination of how manufacturing has evolved to this point and then plotted

its likely evolution based on the key forces at work in the global manufacturing

sector. We also sought to understand the implications of these shifts for

companies and policy makers. Our research combined extensive macroeconomic

analyses with industry insights from our global operations experts. In addition,

we conducted “deep dive” analyses of select industries, including automotive,

aerospace, pharmaceuticals, food, steel, and electronics manufacturing.

We ind that manufacturing continues to matter a great deal to both developing

and advanced economies. We also see that it is a diverse sector, not subject

to simple, one-size-its-all approaches, and that it is evolving to include more

service activities and to use more service inputs. And we see that the role of

manufacturing in job creation changes as economies mature. Finally, we ind that

the future of manufacturing is unfolding in an environment of far greater risk and

uncertainty than before the Great Recession. And in the near term, the lingering

effects of that recession present additional challenges. To win in this environment,

companies and governments need new analytical rigor and foresight, new

capabilities, and the conviction to act.

Executive summary

2

ManufacTurInG MaTTers, buT ITs naTure Is chanGInG

Manufacturing industries have helped drive economic growth and rising living

standards for nearly three centuries and continue to do so in developing

economies. Building a manufacturing sector is still a necessary step in national

development, raising incomes and providing the machinery, tools, and materials

to build modern infrastructure and housing. Even India, which has leapfrogged

into the global services trade with its information technology and business

process outsourcing industries, continues to build up its manufacturing sector to

raise living standards—aiming to raise the share of manufacturing in its economy

from 16 percent today to 25 percent by 2022.1

how manufacturing matters

Globally, manufacturing output (as measured by gross value added) continues

to grow—by about 2.7 percent annually in advanced economies and 7.4 percent

in large developing economies (between 2000 and 2007). Economies such as

China, India, and Indonesia have risen into the top ranks of global manufacturing

and in the world’s 15 largest manufacturing economies, the sector contributes

from 10 percent to 33 percent of value added (Exhibit E1).

1 India’s national manufacturing policy, adopted in November 2011, calls for setting up national

manufacturing zones, creating 100 million manufacturing jobs, and raising manufacturing’s

contribution to GDP from 16 percent today to 25 percent by 2022.

exhibit e1

Large developing economies are moving up in global manufacturing

SOURCE: IHS Global Insight; McKinsey Global Institute analysis

1 South Korea ranked 25 in 1980.

2 In 2000, Indonesia ranked 20 and Russia ranked 21.

NOTE: Based on IHS Global Insight database sample of 75 economies, of which 28 are developed and 47 are developing.

Manufacturing here is calculated top down from the IHS Global Insight aggregate; there might be discrepancy with bottom-up

calculations elsewhere.

Top 15 manufacturers by share of global nominal manufacturing gross value added

Rank 1980 1990 2000 2010

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

United States

Germany

Japan

United Kingdom

France

Italy

China

Brazil

Spain

Canada

Mexico

Australia

Netherlands

Argentina

India

United States

Japan

Germany

Italy

United Kingdom

France

China

Brazil

Spain

Canada

South Korea1

Mexico

Turkey

India

Taiwan

United States

Japan

Germany

China

United Kingdom

Italy

France

South Korea

Canada

Mexico

Spain

Brazil

Taiwan

India

Turkey

United States

China

Japan

Germany

Italy

Brazil

South Korea

France

United Kingdom

India

Russia2

Mexico

Indonesia2

Spain

Canada

3Manufacturing the future: The next era of global growth and innovation

McKinsey Global Institute

Manufacturing makes outsized contributions to trade, research and development

(R&D), and productivity (Exhibit E2). The sector generates 70 percent of exports

in major manufacturing economies—both advanced and emerging—and up to

90 percent of business R&D spending. Driven by global competition in many

subsectors, manufacturing’s share of productivity growth is twice its share of

employment in the EU-15 nations and three times its share of US employment.

Such productivity growth provides additional beneits, including considerable

consumer surplus: since the 1980s, rising eficiency and technological advances

have limited increases in the cost of durable goods in the United States to a

tenth the rate of consumer price inlation. To capture these economic beneits,

countries must create and exploit comparative advantages to convince the most

globally competitive and productive companies to participate in their economies.

The role of manufacturing in the economy changes over time. Empirical evidence

shows that as economies become wealthier and reach middle-income status,

manufacturing’s share of GDP peaks (at about 20 to 35 percent of GDP). Beyond

that point, consumption shifts toward services, hiring in services outpaces job

creation in manufacturing, and manufacturing’s share of GDP begins to fall along

an inverted U curve. Employment follows a similar pattern: manufacturing’s

share of US employment declined from 25 percent in 1950 to 9 percent in 2008.

In Germany, manufacturing jobs fell from 35 percent of employment in 1970 to

18 percent in 2008, and South Korean manufacturing went from 28 percent of

employment in 1989 to 17 percent in 2008.

As economies mature, manufacturing becomes more important for other

attributes, such as its ability to drive productivity growth, innovation, and

trade. Manufacturing also plays a critical role in tackling societal challenges,

such as reducing energy and resource consumption and limiting greenhouse

gas emissions.

exhibit e2

Manufacturing contributes disproportionately to exports, innovation, and productivity growth

SOURCE: EU KLEMS; IHS Global Insight; OECD STAN, and ANBERD; Eurostat; World Bank; McKinsey Global Institute

analysis

%

1 Manufacturing GDP as share of global GDP.

2 2006 data for advanced economies sample of United States, Japan, and EU-15; employment growth contribution calculated

for 1996–2006 period.

3 Sample of 28 advanced and 8 developing economies.

4 2008 average of manufacturing share of business R&D spend in Germany and Korea (89%), Japan and China (87%), Mexico

(69%), and United States (67%).

5 Manufacturing share of productivity growth in EU-15 for 1995-2005 period.

84

86

30

23

Exports, 20103 70

Employment, 20062 14

16Value added, 20101

77Private sector R&D, 20084

Manufacturing

All other sectors

63

80

100

Value added, 2000–101 20

Productivity, 1995–20055 37

-24Employment, 1996–20062

Contributions to growth

Key indicators

4

As advanced economies recover from the Great Recession, hiring in

manufacturing may accelerate. And the most competitive manufacturing nations

may even raise their share of net exports. Whether such a rebound can be

sustained, however, depends on how well countries perform on a range of

fundamental factors that are important to manufacturing industries: access to

low-cost or high-skill labor (or both); proximity to demand; eficient transportation

and logistics infrastructure; availability of inputs such as natural resources or

inexpensive energy; and proximity to centers of innovation.

Manufacturers in advanced economies will continue to hire workers, both in

production and non-production roles, such as design and after-sales service.

But in the long run, manufacturing’s share of employment will continue to be

under pressure in advanced economies. This is due to ongoing productivity

improvements, the continued growth of services as a share of the economy, and

the force of global competition, which pushes advanced economies to specialize

in more high-skill activities. Manufacturing cannot be expected to create mass

employment in advanced economies on the scale that it did decades ago.

Manufacturing is not monolithic

In order to craft effective business and policy strategies in manufacturing, it

is important to start with an understanding of the fundamental differences

between manufacturing industries. We identify ive broad segments that vary

signiicantly in their sources of competitive advantage and how different factors

of production inluence where companies build factories, carry out R&D, and go

to market. Depending on the industry, factors such as energy and labor costs or

proximity to talent, markets, and partners such as suppliers and researchers have

greater weight (Exhibit E3). Indeed, many manufacturing companies, including

in industries such as automotive and aerospace, are already concerned about a

skill shortage.

We ind this segmentation a helpful way to see the global nature of different

industries, anticipate where manufacturing activities are most likely to take place,

and understand the role of innovation in various industries. For companies, the

segmentation helps to explain the evolution of different parts of their operations,

from individual business units to various stages of their supply chains. The

segmentation can also clarify the differences between segments of the same

industry—why suppliers of automotive electronic components respond to

very different dynamics than suppliers of mechanical parts, for example. The

framework also helps explain why the needs and factors of success vary even

within the same industry; the carmaker that emphasizes its technological edge

and precision engineering has very different requirements than the producer of

low-cost models.

5Manufacturing the future: The next era of global growth and innovation

McKinsey Global Institute

The largest group is global innovation for local markets, which is composed of

industries such as chemicals (including pharmaceuticals); automobiles; other

transportation equipment; and machinery, equipment, and appliances. These

industries accounted for 34 percent of the $10.5 trillion (nominal) in global

manufacturing value added in 2010. Industries in this group are moderately to

highly R&D-intensive and depend on a steady stream of innovations and new

models to compete. Also, the nature of their products is such that production

facilities are distributed close to customers to minimize transportation costs. The

footprints of these industries may also be inluenced by regulatory effects (e.g.,

safety standards) and trade agreements.

Regional processing industries are the second-largest manufacturing group

globally, with 28 percent of value added, and the largest employer in advanced

economies. The group includes food processing and other industries that locate

close to demand and sources of raw materials; their products are not heavily

traded and not highly dependent on R&D, but they are highly automated. Energy-

and resource-intensive commodities such as basic metals make up the third-

largest manufacturing group. For these companies, energy prices are important,

but they are also tied to markets in which they sell, due to high capital and

transportation costs.

Global technology industries such as computers and electronics depend

on global R&D and production networks; the high value density of products

such as electronic components and mobile phones, make them economically

transportable from production sites to customers around the globe. Finally, labor-

intensive tradables, such as apparel manufacturing, make up just 7 percent of

exhibit e3

Group

Furniture, jewelry, toys, other

Textiles, apparel, leather

Medical, precision, and optical

Semiconductors and electronics

Computers and office machinery

Basic metals

Mineral-based products

Paper and pulp

Refined petroleum, coke, nuclear

Wood products

Printing and publishing

Food, beverage, and tobacco

Fabricated metal products

Rubber and plastics products

Machinery, equipment, appliances

Electrical machinery

Other transport equipment

Motor vehicles, trailers, parts

Chemicals

Value density

Trade intensity

Energy intensity

Capital intensity

Labor intensity

R&D intensityIndustry

Manufacturing is diverse: We identify

five broad groups with very different

characteristics and requirements

SOURCE: IHS Global Insight; OECD; Annual Survey of Manufacturers (ASM) 2010; US 2007 Commodity Flow Survey;

McKinsey Global Institute analysis

High

Upper-middle

Lower-middle

Low

% of global

manufacturing

value added

Labor-intensive tradables

Global technologies/ innovators

Energy-/ resource-intensive commodities

Regional processing

Global innovation for local markets

7

9

22

28

34

6

value added. The group’s goods are highly tradable and companies require low-

cost labor. Production is globally traded and migrates to wherever labor rates are

low and transportation is reliable.

We see that the ive segments make very different contributions to the global

manufacturing sector and have evolved in dramatically different ways. Industries

in just two of the ive segments—regional processing and global innovation

for local markets—together make up nearly two-thirds of manufacturing value

added and more than half of manufacturing employment, both in advanced and

emerging economies. Two other industry groups—global technologies and labor-

intensive tradables—are both highly traded globally, but exist at opposite ends of

the skill spectrum. Together, they make up only 16 percent of value added in both

advanced and emerging economies.

The evolution of these manufacturing groups has resulted in some specialization

across different types of economies. Advanced economies retain a lead in the

global innovation for local markets group and are less competitive in labor-

intensive manufacturing. In 2010, advanced economies ran a $726 billion surplus

in goods such as automobiles, chemicals, pharmaceuticals, and machinery, and

had a $342 billion trade deicit in labor-intensive tradables. While labor-intensive

industries in advanced economies have shed 37 percent of their jobs since 1995,

regional processing industries (e.g., food manufacturing) have lost only 5 percent

of their employment (Exhibit E4).

exhibit e4

Manufacturing employment in advanced economies has declined across all groups but has fallen most in the labor-intensive tradables group

SOURCE: EU KLEMS; OECD; McKinsey Global Institute analysis

100

90

85

80

75

70

65

0

Manufacturing overall

2000999897

95

04 05 06 2007

Global innovation forlocal markets

Regional processing

Global technologies/ innovators

Energy- and resource-Intensive commodities

Labor-intensivetradables

030201

105

961995

Manufacturing employment by group in selected advanced economies, 1995–20071

Index: 1995 = 100

Share of manufacturing employment%

1995

33

28

8

14

16 12

37

30

8

13

20072000

35

29

9

14

14

1 Sample of 17 advanced economies: EU-15, Japan, and United States.

NOTE: Numbers may not sum due to rounding.

7Manufacturing the future: The next era of global growth and innovation

McKinsey Global Institute

The distinction between manufacturing and services has blurred

Manufacturing has always included a range of activities in addition to production.

Over time, service-like activities—such as R&D, marketing and sales, and

customer support—have become a larger share of what manufacturing

companies do. More than 34 percent of US manufacturing employment is in such

service-like occupations today, up from about 32 percent in 2002. Depending on

the segment, 30 to 55 percent of manufacturing jobs in advanced economies are

service-type functions (Exhibit E5), and service inputs make up 20 to 25 percent

of manufacturing output.

Manufacturing companies rely on a multitude of service providers to produce

their goods. These include telecom and travel services to connect workers in

global production networks, logistics providers, banks, and IT service providers.

We estimate that 4.7 million US service sector jobs depend on business from

manufacturers. If we count those and one million primary resources jobs related

to manufacturing (e.g., iron ore mining), total manufacturing-related employment in

the United States would be 17.2 million, versus 11.5 million in oficial data in 2010.

Including outsourced services, we ind that services jobs in US manufacturing-

related employment now exceed production jobs—8.9 million in services versus

7.3 million in production.

Just as manufacturing creates demand for services inputs, services also create

demand for manufactured goods. For every dollar of output, US manufacturers

use 19 cents of service inputs, creating $900 billion a year in demand for

services, while services create $1.4 trillion in US manufacturing demand. In China

manufacturing creates $500 billion in services demand, and services demand

$600 billion a year in manufactured goods. And while manufacturing drives more

than 80 percent of exports in Germany, services and manufacturing contribute

nearly equal shares of value added to the country’s total exports.

exhibit e5

45

60

69

69

70

Labor-

intensive

tradables

30

Energy-/

resource-

intensive

commodities

31

Regional

processing31

Global

innovation for

local markets

40

Global

technologies/

innovators

55

Service type activities already make up 30 to 55 percentof manufacturing employment

SOURCE: US Bureau of Labor Statistics (BLS); McKinsey Global Institute analysis

10037

63

TotalService

type

Manufac-

turing

type

Manufacturing occupations in the United States in 20101

%

Service type

Manufacturing type

1 Manufacturing-type occupations refer to early-stage manufacturing and final assembly. Service occupations include R&D,

procurement, distribution, sales and marketing, post-sales service, back-office support, and management.

8

The role of manufacturing in job creation is changing

Manufacturing’s role in job creation shifts over time as manufacturing’s share of

output falls and as companies invest in technologies and process improvements

that raise productivity. Hiring patterns within manufacturing also change, with

hiring skewed toward high-skill production jobs and both high- and low-skill

service jobs, as hiring in production overall slows. At the same time, growth in

service-sector hiring accelerates, raising that sector’s share of employment. This

pattern holds across advanced economies and will hold for today’s developing

economies as they become wealthier. As manufacturing’s share of national output

falls, so does its share of employment, following an inverted U curve (Exhibit E6).

We ind that manufacturing job losses in advanced economies have been

concentrated in labor-intensive and highly tradable industries such as apparel

and electronics assembly. However, overall in the United States, trade and

outsourcing explain only about 20 percent of the 5.8 million manufacturing

jobs lost during the 2000-10 period; more than two-thirds of job losses can be

attributed to continued productivity growth, which has been outpacing demand

growth for the past decade.

Even strong manufacturing exporting nations have shed jobs in the past decade.

Germany’s manufacturing employment fell by 8 percent and South Korea’s by

11 percent. Our analysis indicates that while manufacturing output will continue

to rise and manufacturers will hire more high-skill production workers and

workers in non-production roles, overall manufacturing employment will remain

under pressure in advanced economies; if current trends persist, manufacturing

employment in advanced economies could fall from 45 million jobs today to fewer

than 40 million by 2030.

exhibit e6

SOURCE: GGDC 10-Sector Database: “Structural change and growth accelerations in Asia and Latin America: A new sectoral

data set,” Cliometrica, volume 3, Issue 2, 2009; McKinsey Global Institute analysis

Manufacturing’s share of total employment falls as the economy grows wealthier, following an inverted U pattern

0

5

10

15

20

25

30

35

40

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Manufacturing employment% of total employment

GDP per capita1990 PPP-adjusted dollars1

Germany

India

Mexico

Taiwan

United States

South Korea

Japan

United Kingdom

1 Adjusted using the Geary-Khamis method to obtain a 1990 international dollar, a hypothetical currency unit that allows

international comparisons adjusted for exchange rates and purchasing power parity (PPP).

9Manufacturing the future: The next era of global growth and innovation

McKinsey Global Institute

Manufacturing has been regarded as a source of “better” jobs than services,

offering higher levels of compensation. However, we ind that this distinction is

far less clear today. It is true that in aggregate, average compensation is higher

in manufacturing than in services (17 percent higher in 2006, measured as total

labor compensation including social security payments). But when manufacturing

and service jobs in industries that have similar factor intensity are compared, the

wage differences are small. The gap in average pay between manufacturing and

services also is seen in wage distribution. Manufacturing has a disproportionately

high number of well-paying jobs in the United States (700,000 more) compared

with services and a disproportionately small number of low-paying jobs (720,000

fewer). These wage differences may relect trade and offshoring effects,

unionization, and legacy wage arrangements.

new OPPOrTunITIes arIse In a MOre cOMPlex and

uncerTaIn envIrOnMenT

An exciting new era of global manufacturing is ahead—driven by shifts in

demand and by innovations in materials, processes, information technology,

and operations. The prospect is for a more “global” manufacturing industry, in

which developing economies are the source of new customers as well as the

source of low-cost production. It can also be a time of rapid innovation, based on

new technologies and methods. However, these opportunities arise in a global

environment that is strikingly different from that of the pre-recession period, with

shifts in the cost and availability of factor inputs (e.g., labor and natural resources)

and rising complexity, uncertainty, and risk.

Some forces are already being felt: the shift of global demand toward developing

economies, the proliferation of products to meet fragmenting customer demand,

the growing importance of value-added services, and rising wages in low-cost

locations. Other trends are now becoming more pronounced, such as a growing

scarcity of technical talent to develop and run manufacturing tools and systems,

and the use of greater intelligence in product design and manufacturing to boost

resource eficiency and track activity in supply chains.

demand is shifting and fragmenting

The shift in global demand for manufactured goods is happening at an

accelerating pace, driven by the momentum of emerging economies. In China,

per capita income for more than one billion citizens has doubled in just 12 years,

an achievement that took the United Kingdom 150 years with just nine million

inhabitants as it industrialized. And China is not alone. With industrialization and

rising productivity spreading to other parts of Asia and Africa, some 1.8 billion

people are expected to join the global consuming class by 2025, expanding

markets for everything from mobile phones to refrigerators and soft drinks.

These new consumers often require very different products to meet their

needs, with different features and price points, forcing manufacturers to offer

more varieties and SKUs (stock-keeping units). At the same time, customers

in more established markets are demanding more variety and faster product

cycles, driving additional fragmentation. Finally, customers increasingly look to

manufacturers for services, particularly in business-to-business (B2B) markets,

creating an additional demand shift.

10

Innovations create new possibilities

A rich pipeline of innovations promises to create additional demand and drive

further productivity gains across manufacturing industries and geographies. New

technologies are increasing the importance of information, resource eficiency,

and scale variations in manufacturing. These innovations include new materials

such as carbon iber components and nanotechnology, advanced robotics and

3-D printing, and new information technologies that can generate new forms of

intelligence, such as big data and the use of data-gathering sensors in production

machinery and in logistics (the so-called Internet of Things).

Across manufacturing industries, the use of big data can make substantial

improvements in how companies respond to customer needs and how they run

their machinery and operations. These enormous databases, which can include

anything from online chatter about a brand or product to real-time feeds from

machine tools and robots, have great potential for manufacturers—if they can

master the technology and ind the talent with the analytical skills to turn data into

insights or new operating improvements.

Important advances are also taking place in development, process, and

production technologies. It is increasingly possible to model the performance of a

prototype that exists only as a CAD drawing. Additive manufacturing techniques,

such as 3-D printing, are making prototyping easier and opening up exciting

new options to produce intricate products such as aerospace components and

even replacement human organs. Robots are gaining new capabilities at lower

costs and are increasingly able to handle intricate work. The cost of automation

relative to labor has fallen by 40 to 50 percent in advanced economies since

1990. In addition, advances in resource eficiency promise to cut use of materials

and energy (i.e., green manufacturing). An emerging “circular” economy will help

stretch resources through end-of-life recycling and reuse.

an uncertain environment complicates strategy

Even as new markets and technologies open up fresh opportunities for

manufacturing companies, a series of changes in the environment creates new

challenges and uncertainty. The growth of global value chains has increased

exposure of many companies to the impact of natural disasters, as Japan’s

2011 earthquake and Thailand’s looding have demonstrated. And after years

of focusing on optimizing their value chains for low cost, many manufacturing

companies are being forced to reassess the balance between eficiency gains

from globally optimized value chains and the resilience of less fragmented and

dispersed operations.

Catastrophic events are not the only sources of uncertainty facing manufacturing

companies. Manufacturers also face luctuating demand and commodity prices,

currency volatility, and various kinds of supply-chain disruptions that chip away

at proits, increase costs, and prevent organizations from exploiting market

opportunities. Price increases in many commodities in the past decade have

all but erased the price declines of the past century. Volatility in raw materials

prices has increased by more than 50 percent in recent years and is now

at an all-time high.2 Long-term shifts in global demand are accompanied by

2 Resource revolution: Meeting the world’s energy, materials, food, and water needs, McKinsey

Global Institute, November 2011 (www.mckinsey.com/mgi).

11Manufacturing the future: The next era of global growth and innovation

McKinsey Global Institute

signiicant upswings and downswings in demand, driven by changes in customer

preferences, purchasing power, and events such as quality problems.

Government action is another source of uncertainty. Governments continue to

be active in manufacturing policy, even as the path of economic growth and

the outlook for iscal and inancial market stability remain uncertain. All too

often government action (and lack of action) simply adds to uncertainty. This is

the case with unclear energy and carbon emissions policies. And, while trade

barriers continue to fall around the world with the proliferation of preferential trade

agreements, there are many exceptions. Government interventions persist—

sometimes with protectionist measures—in industries such as autos and steel,

which many governments regard as national priorities for employment and

competitiveness. Steel tariffs have fallen over the past 20 years, but governments

continue to favor domestic steel production in other ways.

As the world works through the aftermath of the inancial crisis with household,

banking, and public sector deleveraging; as rebalancing of trade propels

exchange rate swings; and as the momentum of emerging economies puts

friction on natural resource prices, uncertainty will prevail.

Implications for footprints, investment, and competition

Taken together, the opportunities and challenges described here have the

potential to shift the basis for how companies pursue new markets and how they

will expand their production and R&D footprints. Not only will companies compete

in different ways and build new production and supply networks as they respond

to new kinds of demand and forces of change in the global environment, but

nations also will learn to compete on a wider range of factors than labor cost or

tax rates.

For example, rather than simply responding to changing labor rates,

manufacturers will need to consider the full range of factor inputs as they weigh

the trade-offs between where they produce their goods and where they sell

them. Much has been made of rising Chinese labor costs and falling wages in the

United States. However, for most manufacturers, the more pressing workforce

issue likely will be the struggle to ind well-trained talent. Manufacturing is

increasingly high-tech, from the factory loor to the back ofices where big data

experts will be analyzing trillions of bytes of data from machinery, products in

the ield, and consumers. The global supply of high-skill workers is not keeping

up with demand, and the McKinsey Global Institute projects a potential shortage

of more than 40 million high-skill workers by 2020. Aging economies, including

China, will face the greatest potential gaps.

Global competition will also be affected by demand shifts and changes in the

cost and availability of various supply factors. The global footprint of regional

processing industries such as food processing will naturally follow demand,

but for other industries such as automobiles and machinery, transportation and

logistics costs or concerns about supply-chain resilience may trump labor costs.

Assessing the future pattern of costs and availability of resources such as raw

materials and energy has become more complex. Resource prices rose rapidly

before the recession and remain high by 20th-century standards. Yet access

to previously untapped sources, such as shale gas in the United States, can

change the relative costs of energy inputs and promote domestic production as

12

a substitute for imports. Then again, many energy-intensive processing industries

such as steel tend to be located near demand, and their footprints are “sticky”

due to high capital investments and high exit costs. In many industries, market

proximity, capital intensity, and transport and logistics matter as much as energy

and labor costs.

Finally, to compete, companies also may need to consider access to centers of

innovation. This applies to many industries, not just those that make high-tech

products. In the United States, for example, a new auto industry technology

cluster is emerging around South Carolina’s auto factories.

For companies, the new mindset for making footprint decisions is not just about

where to locate production, but also who the competitors are, how demand is

changing, how resilient supply chains have to be, and how shifts in factor costs

affect a particular business. As new geographic markets open up, companies

will be challenged to make location trade-offs in a highly sophisticated, agile way.

They will need to weigh proximity to markets and sources of customer insights

against the costs and risks in each region or country.

On their part, policy makers will need to recognize that every country is going

to compete for global manufacturing industries. Governments will need to invest

in building up their comparative advantages—or in acquiring new ones—to

increase their appeal to globally competitive and productive companies. As

governments compete, they can help tilt the decisions for these companies by

taking a comprehensive view of what multinational manufacturing corporations

need: access to talent, reliable infrastructure, labor lexibility, access to necessary

materials and low-cost energy, and other considerations beyond investment

incentives and attractive wage rates.

ManufacTurers wIll need deTaIled InsIGhTs InTO

new OPPOrTunITIes, aGIlITy, and new caPabIlITIes

To take advantage of emerging opportunities and navigate in a more challenging

environment, manufacturing companies need to develop new muscles. They

will be challenged to organize and operate in fundamentally different ways to

create a new kind of global manufacturing company—an organization that more

seamlessly collaborates around the world to design, build, and sell products

and services to increasingly diverse customer bases. These organizations will

be intelligent and agile enterprises that harness big data and analytics, and

collaborate in ecosystems of partners along the value chain, to drive decision

making, enhance performance, and manage complexity. They will have the vision

and commitment to place the big bets needed to exploit long-term trends such

as rising demand in emerging markets, but also will use new tools to manage the

attendant risks and near-term uncertainties.

conventional strategies will be increasingly risky; granularity is key

Companies that stick to business-as-usual approaches will be increasingly at risk.

Manufacturers will no longer succeed by “copying and pasting” old strategies into

new situations. They must develop a granular understanding of the world around

them—and plan the operations strategy to compete in it.

First, manufacturers must understand the dynamics of their segments (e.g., their

labor, energy, or innovation intensity), and how new trends play against those

requirements and have the potential to redeine sources of competitive advantage.

13Manufacturing the future: The next era of global growth and innovation

McKinsey Global Institute

They will need to understand the trends thoroughly and how they apply to their

industries, markets, and customers to identify new opportunities and develop

strategies to capture them.

Second, companies must develop a detailed, granular view of markets and

customer segments to identify and tailor products and supply-chain strategies

to speciic subsegments of markets. A McKinsey study, for example, found that

segmenting the Chinese market on a national or even on a regional/city basis was

not adequate. By analyzing consumer characteristics, demographics, government

policies, and other factors, the study identiied 22 distinct market clusters that

can be targeted independently. In Africa, Nokia learned that consumers had a

very different concept of what was valuable in a mobile handset: it had to be

affordable, but it also had to have a built-in lashlight and radio, as well as a

waterproof case.

Third, companies must match granular insights with granular operations strategy.

This will be critically important for capturing new opportunities in developing

economies. Recycling the proven methods from advanced economies or even

from other emerging markets won’t do. A consumer product manufacturer was

frustrated in its attempts to enter an emerging market until it conducted detailed

on-the-ground research. Only then did it learn that, unlike in every other nation

where it sold this particular product, consumers in this emerging market required

packaging that could be reused for other purposes after the contents were

used up.

beyond simple labor-cost arbitrage: total factor performance

The way footprint decisions have been made in the past, especially the herd-like

relex to chase low-cost labor, needs to be replaced with more nuanced, multi-

factor analyses. Companies must look beyond the simple math of labor-cost

arbitrage to consider total factor performance across the full range of factor

inputs and other forces that determine what it costs to build and sell products—

including labor, transportation, leadership talent, materials and components,

energy, capital, regulation, and trade policy. In doing so, the answers to key

questions will often shift: for example, where to locate plants, or whether to

automate or not. While companies have talked about taking a total landed cost

view for some time, few get it right.

In an increasingly uncertain and volatile world, companies also need to shift

strategic and business planning from simple point forecasts to scenario

assessments that accurately relect the variability of key factors and drivers. We

ind that companies still make simple trade-offs because they are not equipped

to deal with complexity and fail to take into account the full range of factors and

possible outcomes.

Invest and operate with agility

Manufacturers need to be able to make major commitments and manage risk

and uncertainty at the same time. The fundamental shifts in demand that are

now under way will play out over decades, requiring long-term strategic bets

and investments; it can take seven to ten years for even the most successful

multinationals to break even in new emerging markets. Yet, even as companies

make these commitments, they will face risk and complexity along the way. To

achieve this balance between long-term commitment and risk management,

companies are making diverse, agile investments. They are getting adept at

14

scenario planning and at dividing investments among smaller bets across a

portfolio of initiatives. The goal is to make each strategic choice less critical, less

permanent, and less costly to reverse or redirect. Manufacturers should also

continue to heed the productivity imperative. The pursuit of “lean” manufacturing

processes is not inished. There continues to be wide variation among the most

and least productive players within industries, and the process of simplifying,

consolidating, and removing ineficiencies from operations is extending to new

areas, such as resource productivity.

To translate strategies into action and make the most of long-term investments,

companies also will need to have agile operations. Agility in operations goes far

beyond simply ensuring business continuity in the face of risk; it is also about

exploiting opportunity, raising the clock rate, and building resilience to daily

shocks. Companies with agile operations not only respond more successfully to

the bumps along the way and the opportunities, but they also preempt possible

disruptions. For example, agile food manufacturers have developed recipes that

can accommodate different forms of sugar in case one variety is in short supply.

build new capabilities for new times

To act on these new bets and execute with agility, companies also will need to

develop new operational capabilities and methods. New data-gathering and

analytical tools can help identify opportunities to serve new markets, better

manage supply chains, and drive innovation and delivery in services. But to make

use of big data and analytics, manufacturing companies will need to build new

routines for cross-functional and cross-geography collaboration.

New information technologies and new methods will require new tools, talent,

and mindsets. To respond quickly to changes in market requirements and meet

the demand for faster product cycles, companies will need to build integrated

ecosystems of suppliers, researchers, and partners. To design and manage

global footprints, companies will need to develop skills in calculating total factor

and lifecycle costs (including exit expenses). And the productivity imperative will

not go away, but will continue and expand beyond traditional capital/labor trade-

offs to include resource productivity.

Finally, manufacturing companies will need to invest in their organizations.

Manufacturers have to ight hard to win the war for talent—everything from

experts in big data, to executives with deep understanding of emerging markets,

to skilled production workers. In many places, manufacturers will need to get

more involved in building a talent pipeline. For example, Siemens is implementing

a German-style apprenticeship program in Charlotte, North Carolina. Apprentices

graduate from the work-study program with degrees in “mechatronics”

(mechanical engineering, systems design, and electronics) and are qualiied for

employment with Siemens.

15Manufacturing the future: The next era of global growth and innovation

McKinsey Global Institute

POlIcy MaKers wIll need new aPPrOaches and

caPabIlITIes TO bOOsT cOMPeTITIveness

As manufacturing evolves, policy makers must adjust their expectations and look

at manufacturing not as a source of mass employment in traditional production

work but as a critical driver of innovation, productivity, and competitiveness.

Policies aimed at promoting the health of manufacturing industries also must

incorporate the crucial contributions that service employees, services suppliers,

and collaborators make. Take exports: between 2000 and 2011, services exports

grew slightly faster than goods exports in most advanced economies. In addition,

services such as training and maintenance are a growing complement to

equipment and machinery exports.

Policy needs to be grounded in a thorough understanding of the diverse

industry segments in a national or regional economy and the wider trends that

are affecting manufacturing industries. For example, shapers of energy policy

need to be cognizant of what industries will be affected by relative energy costs

and how great the impact is likely to be—and what magnitude of difference is

likely to trigger a location decision. Policy makers should also recognize that

supporting new capabilities at home and forging connections needed to access

rapidly growing emerging markets are likely to have greater long-term beneits

than ighting against the tide. In the ierce competition for attracting and growing

leading global companies, manufacturing policies also need to be evaluated

against actions by other governments.

The role of policy in manufacturing is largely about enabling and creating an

environment for competitive and innovative companies to lourish, helping create

sustainable conditions for local manufacturing. There may also be an economic

case for intervening to correct market failures or to support young industries,

as with US defense spending on emerging technologies or the support that

Taiwanese research institutions provided to that nation’s semiconductor industry.3

As policy makers develop new approaches to support manufacturing, they need

to consider the full policy tool kit. They need to remove regulatory barriers to

growth (from red tape to trade barriers) and strengthen underlying enablers by

supporting R&D and investing in infrastructure. In the increasingly competitive

environment to attract global companies and encourage their expansion,

governments that are able to coordinate their interventions with the private sector

and excel in delivering a competitive ecosystem to sustain talent and innovation

are more likely to succeed.

A key policy priority for manufacturing is education and skill development.

The basis of competition in most manufacturing sectors is shifting and access

to diverse talent pools is critically important. Companies need to build R&D

capabilities as well as expertise in data analytics and product design. They will

need qualiied, computer-savvy factory workers and agile managers for complex

global supply chains. In addition to continuing efforts to improve public education,

particularly in teaching math and analytical skills, policy makers need to work with

industry and educational institutions to ensure that skills learned in school it the

needs of employers.

3 How to compete and grow: A sector guide to policy, McKinsey Global Institute, March 2010

(www.mckinsey.com/mgi), includes a detailed discussion of the role different governments

played in the early stages of semiconductor industry growth, among other examples.

16

As we publish this report, ive years after the beginning of the Great Recession,

we see a new era of global manufacturing beginning to take shape. Even as the

global economy continues to deal with the aftermath of the recession and the

lingering effects on demand and inance, companies are becoming energized by a

new series of opportunities that shifting demand and innovation are creating. This

new era of manufacturing unfolds in an environment in which old assumptions,

strategies, and policies will no longer sufice. With a thorough understanding of

the fundamental factors that matter to different manufacturing industries and a

sharp focus on the trends shaping global manufacturing, both manufacturing

leaders and policy makers can succeed in this new era. They will need to think

and act in new ways, develop new sorts of capabilities, and move with conviction.

Then, manufacturing can continue to make its great contributions to both

advanced and developing economies.

Global Gas Push Stalls Firms Hit Hurdles Trying to Replicate U.S. Success Abroad Exporting the U.S. shale energy revolution overseas turns out to be far tougher than anyone expected—giving the U.S. a significant competitive advantage. Shale oil and natural gas have rejuvenated the North American energy industry and boosted the economy by supplying companies and consumers with cheap fuel. There are huge shale deposits outside of North America that global energy companies and governments are eager to tap. But oil companies are running into obstacles as they try to replicate the U.S. experience on other continents. The result is that significant overseas shale energy production could be a decade away. Among the reasons for the glacial pace abroad are government ownership of mineral rights, environmental concerns and a lack of infrastructure to drill and transport gas and oil. In addition, much less is known about the geology in most foreign countries than in the U.S., where drilling activity has been going on for more than a century. The upshot: the U.S. and Canada could remain the main countries to reap the economic advantages of shale development for some time. In both countries, a glut of natural gas and ethane is luring petrochemical companies and fertilizer manufacturers to build new plants—a huge change after years of shifting production abroad. Meanwhile, states like Texas and North Dakota that actually have the shale deposits are getting additional boosts to their local economies from drilling activity. Poland was once regarded as one of the more promising plays, but early wells have hit less gas than expected. In addition, community wariness of drilling and changes to the government's tax and royalty rules have dampened industry enthusiasm. Exxon Mobil Corp., XOM -0.60%an early proponent of Polish shale, decided to throw in the towel after drilling just two wells, saying it didn't find enough oil or gas to justify additional drilling. China is believed to have more shale oil and gas than the U.S. The problem is that most of it is in arid or heavily populated areas; oil companies worry they won't be able to obtain enough water to hydraulically fracture the rock—the process needed to free hydrocarbons from shale. "To create a flat drilling pad, we almost always have to take out some part of a hillside and basically someone's rice paddy," says Simon Henry, Royal Dutch Shell RDSB.LN +0.19%PLC's executive director for the Asia Pacific region. Argentina recently nationalized the assets of a Spanish company that discovered an enormous shale deposit there that is estimated to hold nearly one billion barrels of oil. This has chilled outside investment, which already suffered from rules that made it difficult to import needed technology and export potential profits. Houston-based Apache Corp., APA -0.95%which holds rights to drill in 450,000 acres of Argentine shale, says it can cost twice as much to drill a well there as the U.S., and then two to four times as much to frack the well so it can begin producing. Other countries, like France and Bulgaria, have gone further and banned hydraulic fracking altogether because of environmental concerns, essentially stopping development in its tracks. "There was enormous irrational exuberance for global shale development," says Joseph Stanislaw, an independent senior energy adviser to Deloitte LLP. "Then the industry ran into reality. Global shale will happen and when it does begin, it will take off with the same force we've seen in the U.S. But the timeline will take longer than people think." The shale revolution began in the late 1990s when the first modern shale well was drilled a few miles north of Fort Worth, Texas. The technology was pioneered by small, independent companies willing to take enormous financial risks, and helped along by landowners who owned their mineral rights and were ready to sell for a share of the profits. Wall Street eagerly financed shale exploration efforts. The industry also benefited from a large existing pipeline network and ample number of drilling rigs. This combination doesn't exist elsewhere in the world. "The mineral rights, the availability of small players to enter the market, the availability of geological data, these things are all part of an entrepreneurial model that is unique to the United States," says Julio Friedmann, the chief energy technologist at Lawrence Livermore National Laboratory in California. A key, but often overlooked, ingredient to the success of shale development in the U.S. is private ownership of much of the underground gas. That means that environmental concerns about drilling are countered by a built-in constituency of landowners looking to profit.

It is a "marvelously elegant system that ensures that all natural resources are fully developed," says Rex Tillerson, chief executive of Exxon Mobil, which produces more gas in North American than any other company. Outside the U.S., mineral rights are typically owned by governments, leaving locals with little reward for putting up with large-scale industrial drilling. Another difficulty is that little is known about shale deposits around the world—unlike in the U.S. where tens of thousands of wells have been drilled and geologic data is usually made public by state regulators. Geologists know where shale deposits are overseas, but not if the rocks have particular characteristics that make fracking technology work. Still, the prize could be significant and there are many formations around the world that industry experts believe could be as large, or larger, than the prolific Marcellus in Pennsylvania or the Bakken in North Dakota. Last year, a U.S.-government contracted study of 32 countries estimated they held 6.6 quadrillion cubic feet of shale gas, more than 50 years worth of current global consumption. The U.S. held 862 trillion cubic feet, or just 13% of the estimated resource. The study didn't offer an estimate of either the volume of oil in global shales or the size of massive shale deposits in Russia and the Middle East. Other estimators have suggested this figure could be high, but nonetheless expect there is vast untapped energy in shales world-wide.

Companies that are investing in global shale are trying to damp down enthusiasm. Asked this summer about his expectation for shale gas development in Europe, Chevron's CVX -0.97%Vice Chairman George Kirkland said "You are really talking next decade before you get significant volumes." Chevron and other companies still hope to create a shale-gas extraction industry in Poland. Chevron has acquired drilling rights there and hopes there is enough gas to make drilling economical. But the government is facing suspicion and resentment from citizens and has been slow to issue drilling permits. "Investors are right to complain, since our civil service hasn't yet adjusted to the emergence of this sector," says Deputy Environment Minister Piotr Wozniak. He said a new energy law will provide generous compensation to local governments where drilling takes place, something he expects will help placate local opposition. In the Polish village of Lubocino, a farming community near the Baltic Sea, state-controlled energy company PGNiG SA has tried hard to convince locals that shale development is both safe and of benefit to them. It helped fund a local harvest festival, which was festooned with company logos. PGNiG has also paid for new linoleum floors and digital projectors at an elementary school. This goodwill campaign, though, faces skepticism among some locals, who say that the only jobs offered to Lubocino residents at the drilling site have been security guard and cleaning lady. The company didn't respond to a request for comment on local employment.

Piotr Dampc, a villager who sold PGNiG the land where the well was drilled, said company officials told him the state owned the gas underneath his land and threatened to expropriate some of his 14 acres where the drilling pad was located. PGNiG declined to comment. "They said if we didn't agree to sell, it would take longer," he said. "But it would happen eventually." Source: http://online.wsj.com/article/SB10001424127887324355904578155591443631854.html?

Dec 1st 2012 | from the print edition

Capitalism in India

Ratan Tata’s legacyIndia should learn from the career of its most powerful businessman

IT IS easy to

understand

why Ratan

Tata, who

retires as

chairman of

Tata Sons on

December

28th, is

important.

The

conglomerate

he runs is

India’s largest private-sector concern, accounting for 7% of the stockmarket. It pays 3% of all India’s corporate tax

and 5% of all its excise duty. You can live in a house, drive a car, make a phone call, season your food, insure

yourself, wear a watch, walk in shoes, cool yourself with air-conditioning and stay in a hotel, all courtesy of Tata

firms. Polite, elegant and reserved, Mr Tata has been the king of India’s corporate scene for the past two decades.

Indians look up to him in much the same way that Italians once looked up to Gianni Agnelli at Fiat or Americans did

to J.P. Morgan.

In some ways, though, the reverence for Mr Tata is odd. He is not a geekish entrepreneur, like the high-tech wizards

in Bangalore. He is an old-style dynast—the fifth generation to run his 144-year-old firm. He took time to grow into

the job: when he took the reins in 1991 he struggled to assert himself. Even today, critics accuse him of being regal

and secretive—and snipe that the group’s most successful business, TCS, its technology arm, is the one he left most

alone.

Nor can Tata be hailed as a financial paragon. After a wave of takeovers during the past decade, its return on capital is

mediocre. The new boss, Cyrus Mistry, who comes from outside the family (Mr Tata has no children), may have to

reorganise something of a ragbag conglomerate: alongside the stars like TCS or Jaguar Land Rover, a luxury

carmaker, there is also a long trail of flabby and indebted businesses (see article

(http://www.economist.com/news/business/21567390-ratan-tatas-successor-cyrus-mistry-has-some-dirty-work-do-

pupil-master) ). 

And yet, for all that, Mr Tata’s career carries two powerful lessons for an introverted and corruption-obsessed India.

First, that India has far more to gain than lose from the outside world. And second, that a company can be a force for

progress.

The hereditary ruler as hero

Globalisation came easily to Mr Tata, who trained as an architect in America. Even today he would rather discuss car

designs with young engineers than read management reviews. That education, and a streak of perfectionism, have

served him well. He realised early on that as India’s economy opened in the 1990s its firms would have to raise their

standards, benchmark themselves against the very best, and if necessary buy competitors. His foreign takeovers

included Corus, a giant British steel firm, and Jaguar Land Rover. The first has been a financial disaster, the second a

triumph. But both showed that Indian firms—and those from other emerging economies—deserve their place at the

top table of global business.

Indians would love to claim that this lesson has been thoroughly learnt. Names like Mittal and Infosys are known all

round the world. But India remains a country with too many protected industries, from shopping to coal mining and

newspapers. Mr Tata himself was not always as keen to open up at home as he was to venture abroad. But for the

most part he was a firm advocate of globalisation.

The other lesson from Mr Tata has to do with integrity. His group has not entirely avoided scandals. It faced a rogue

trader in the early 2000s, and did not completely escape the furore over the bent award of telecoms licences in 2008.

No doubt somewhere today, in this firm with $100 billion of sales, funny business is taking place. Rivals grumble that

Tata’s current respectability masks a past spent toadying up to politicians in the years before and after India’s

independence in 1947. But the fact is that Mr Tata, in public, and by widespread repute in private too, has stood

against corruption. His attitude towards India’s political class has been one of polite distance. He has long attacked

what he calls “vested interests”—code for crony capitalism, in which firms make profits by buying favours from

officials and politicians.

Looking in the mirror

Crony capitalism has seldom seemed more of a threat to India. Back in the 1990s, the country’s leading firms—

technology companies as well as Tata Sons—went to extraordinary lengths to be squeaky-clean. Family firms, which

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still control about 40% of India’s stockmarket profits, professionalised their management and listed their shares. But

over the past decade things have gone backwards. The new money has been made in “rent-seeking” sectors, such as

mining and infrastructure, with a lot of government involvement and little foreign competition; some mouth-

wateringly large corruption scandals have occurred there. Too many family firms have lost interest in improving

governance. Some, unwilling to relinquish control by issuing shares, have piled on debt, and now that they are in

trouble, are bullying state-run banks to “extend and pretend”—roll over their loans rather than write them down. Such

firms thus become state-supported zombies.

The Indian public is fed up. Anti-corruption agencies are newly vigilant. Business has become a hall of mirrors in

which fingers point everywhere. Suspicion is so pervasive that even clean officials are terrified to prod along vital

projects by clean companies for fear of being accused of favouritism.

The problems in parts of the private sector have thus become a macroeconomic issue. Investment by private

companies has slumped—the main reason why economic growth has slowed from 10% to about 5.5%.

It is easy to blame all this on corrupt politicians. But somebody is paying the bribes. By standing out against graft so

publicly and consistently, Mr Tata was ahead of his time. The irony is that by doing so he was preparing the way for

the end of businesses such as his own. As India’s economy modernises and becomes more open and transparent, the

rationale may disappear for sprawling, hereditary conglomerates, which use the bonds of kin to deal with a shortage

of trust, and pool their managers and capital because the outside markets for these resources do not work well.

To that extent, Mr Tata may come to be seen as both the last of one breed of feudal corporate leaders—and the first of

another more open bunch. Anybody who cares about India’s future, especially its billion consumers, should hope that

the transition picks up speed again.

Christopher Griffith/Megan Caponetto

110 Predictions For the Next 110 YearsIt's never easy to predict the future. But as PM's 110th anniversary celebration draws to a close, we've decided to try. Here are 110 ambitious ideas for the decades ahead. (For more about PopMech's brain trust and methodology, read Editor-in-Chief Jim Meigs' introduction. And if you want to try your hand at predicting the future, take our Facebook survey, and see when other readers think the most important events of the next 110 years will happen.)BY THE EDITORS

2012—2022

· People will be fluent in every language. With DARPA and Google racing to perfect instant translation, it won't be long until your cellphone speaks Swahili on your behalf. · Software will predict traffic jams before they occur. Using archived data, roadside sensors, and GPS, IBM has come up with a modeling program that anticipates bumper-to-bumper congestion a full hour before it begins. Better yet, the idea proved successful in early tests—even on the Jersey Turnpike. · Climate-controlled jackets will protect soldiers from extreme heat and cold. The secret to all-weather clothing, according to former MIT student Kranthi Vistakula, is Peltier plates, which can be used to warm you up or cool you down by sending an electric

current across the junction between two different metals. U.S. soldiers have put the lightweight tech to the test. So have soldiers in India. Based on early reviews, it won't be long until others enlist. · Nanoparticles will make chemotherapy far more effective. By delivering tiny doses of cisplatin and docetaxel right to cancerous cells, the mini messengers will significantly reduce the pain and side effects of today's treatments. · Electric cars will roam (some) highways. Who says you can't road-trip in a Tesla? In a few years, the 1350-mile stretch of Interstate 5 spanning Washington, Oregon, and California will be lined with fast-charging stations—each no more than 60 miles apart. In some areas you will find stations to the east and west too. Don't get any bright ideas, though. If you try to cross the country, you won't get much farther than Tucson. · Athletes will employ robotic trainers. Picture a rotor-propelled drone that tracks a pattern on your T-shirt with an onboard camera. Now imagine it flying in front of you at world-record pace. That's just the start—a simple concept developed by researchers in Australia.

· Bridges will repair themselves with self-healing concrete. Invented by University of Michigan engineer Victor Li, the new composite is laced with microfibers that bend without breaking. Hairline fractures mend themselves within days when calcium ions in the mix react with rainwater and carbon dioxide to create a calcium carbonate patch. · Digital "ants" will protect the U.S. power grid from cyber attacks. Programmed to wander networks in search of threats, the high-tech sleuths in this software, developed by Wake Forest University security expert Errin Fulp, leave behind a digital trail modeled after the scent streams of their real-life cousins. When a digital ant designed to perform a task spots a problem, others rush to the location to do their own analysis. If operators see a swarm, they know there's trouble. · Scrolls will replace tablets. Researchers have already reproduced words and images on thin plastic digital displays. If they want those displays to compete with the iPad, they need to fine-tune the color and refine the screens so you can put your feet up and watch LeBron throw down on YouTube.

Your Car Will Be Truly Connected

· It will communicate with traffic lights to improve traffic flow. · It will interact with other vehicles to prevent accidents. · It will let you drag and drop a playlist from your home network. · It will find the gas station with the deepest discount and handle the payment. · It will notify you when someone dents your door and supply footage of the incident. As we branch out as a species, it's quite reasonable to think that we'll send 3D printers to other planets to print habitats for humans prior to our arrival. — Dave Evans, Chief Technology Officer and Resident Futurist, Cisco Systems · Your genome will be sequenced before you are born. Researchers led by Jay Shendure of the University of Washington recently reconstructed the genome of a fetus using saliva from the father and a blood sample from the mother (which yielded free-floating DNA from the child). Blood from the umbilical cord later confirmed that the sequencing was 98 percent accurate. Once the price declines, this procedure will allow us to do noninvasive prenatal testing.

10 Things That Will Remain the Same

· Radiation sickness will be cured by injection. Thanks to interest from the Department of Defense, several treatment options are now vying for FDA approval. In clinical trials, one of them, Ex-Rad, has not only prevented long-term cell damage but also promoted bone marrow recovery.

· That car part you need will be sculpted inside a 3D printer. Dentists are already using this modern tech wonder to transform laser scans of your mouth into custom-fit appliances for your teeth. But that's a fraction of what the machine can do. When a 3D printer costs the same as, say, an HDTV, you will use one of your own to download all sorts of useful things, marveling as it creates each item layer by layer from plastic, rubber, titanium—you name it. Just imagine your future self printing a birthday cake, a Rolex, or a catalytic converter for the car. In time you'll even be able to download prescription medicine. · Drugs will be tested on "organ chips" that mimic the human body. Now undergoing trials in 15 research institutions, the new silicon chips feature channels that house living kidney or lung cells, above. Simulated blood and oxygen flow allows them to mirror the actions of real organs, reducing the need for animal testing and speeding up drug development—in the midst of a pandemic, that would be crucial. · Passwords will be obsolete. IBM says it will happen in five years. Who are we to disagree? Apple and Google are designing face-recognition software for cellphones. DARPA is researching the dynamics of keystrokes. Others are looking into retinal scans, voiceprints, and heartbeats. The big question, it seems, is what will you do with all that time you used to spend dreaming up new ways to say JZRulz24/7! · Car tires will be brewed by bacteria. Isoprene—a key ingredient in rubber—is produced naturally by many plants but not at great enough volume to keep pace with the world's demand for tires. It can also be extracted from oil. But biotech firm Genencor has engineered E. coli microbes that produce gobs of the stuff as a by-product of metabolizing plant sugars. Goodyear, a partner in the study, is already testing prototypes of these bio-isoprene tires. · Self-cleaning buildings will help us fight smog. When sunlight strikes their aluminum skin, a titanium dioxide coating releases free radicals, which break down the grime and convert toxic nitrogen oxide molecules in the air into a harmless nitrate. Everything washes away in the rain. · Your clothes will clean themselves too. Engineers in China have developed a titanium dioxide coating that helps cotton shed stains and eliminate odor-producing bacteria. To revive your lucky shirt after a night of poker, you need only step into the sun. · Drones will protect endangered species. Guarding at-risk animals from poachers with foot patrols is expensive and dangerous. This summer rangers in Nepal's Chitwan National Park previewed a savvy solution: Hand-launched drones armed with cameras and GPS provided aerial surveillance of threatened Indian rhinos. · Data will be measured in zettabytes. According to the International Data Corporation, the volume of digital content created on the planet in 2010 exceeded a zettabyte for the first time in history. By the end of this year, the annual figure will have reached 2.7 zettabytes. What exactly does a zettabyte look like? Well, if each byte were a grain of sand, the sum total would allow you to build 400 Hoover Dams. · Rescuers will use electronic noses to locate disaster victims. Some devices will use an array of sensors to rapidly detect carbon dioxide, ammonia, and acetone released into the rubble via breath, sweat, and skin. Others sniff out chemical compounds from human remains buried 3 feet underground. All keep working long after the dogs have retired to their kennels. · Genetic testing will be used to halt epidemics. A year ago, investigators at the National Human Genome Research Institute teamed with doctors in Maryland to track the outbreak of a deadly bacterial infection. The big breakthrough? Real-time genome sequencing, which helped them identify minute mutations in the microbe, determine how it spread, and quickly stop it. · Vaccines will wipe out drug addiction. The human immune system is supremely adept at detecting and neutralizing foreign substances. Why not train it to target illicit ones? That's the idea

behind addiction vaccines: Persuade the body to produce antibodies that shut down drug molecules before they get to the brain. The concept works in mice. Human trials are under way. · Smart homes will itemize electric, water, and gas bills by fixture and appliance. Shwetak Patel, a 30-year-old MacArthur Fellow, is working on low-cost sensors that monitor electrical variations in power lines to detect each appliance's signature. He has already used pressure changes to do the same for gas lines and water pipes. It's up to you to pinpoint where the savings lie. · Vegetarians and carnivores will dine together on synthetic meats. We're not talking about tofu. We're talking about nutritious, low-cost substitutes that look and taste just like the real thing. Twitter co-founder Biz Stone has already invested in Beyond Meat, which makes plant-based chicken strips so convincing they almost fooled New York Times food writer Mark Bittman.

2023—2062

· Contact lenses will grant us Terminator vision. When miniaturization reaches its full potential, achieving superhuman eyesight will be as simple as placing a soft lens on your eye. Early prototypes feature wirelessly powered LEDs. But circuits and antennas can also be grafted onto flexible polymer, enabling zooming, night vision, and visible data fields. · Checkups will be conducted by cellphone. The technology is no problem. Scientists are hard at work trying to perfect apps that can measure your heart and respiration rates, perform blood and saliva tests—even evaluate your cough. Question is how long will it take the medical industry to embrace them.

· All 130 million books on the planet will be digitized. In 2010 Google planned to complete the job by decade's end, but as of March it still had 110 million tomes to go, so we're adding wiggle room. You might use the time to shop for storage, because given today's options and the average size of an e-book (3 MB), you'll need 124 3-terabyte drives to carry the library of humanity with you. It won't fit into a backpack, but it's small enough to schlep in a hockey bag. · Nurse Jackie will be a robot. By 2045, when seniors (60-plus) outnumber the planet's youth (15 and under) for the first time in history, hospitals will use robots to solve chronic staffing issues. Expect to find the new Nightingales lifting patients and pushing food carts. Engineers at Purdue University are thinking even bolder—designing mechanical scrub nurses that respond to hand gestures during surgery. · Supersonic jets will return—for good this time. The limit on supersonic flight is not one of engineering but of economics. Aircraft that break the speed of sound guzzle fuel, so new jet engines will have to be efficient. One solution—the pulse detonation engine, which uses a fuel—air mixture—was tested at the Mojave Air & Space Port in 2008. By 2030 a successor will power that fabled 2-hour hop from New York to London.

Your Car WIll Be Truly Connected

· The refrigerator will place your grocery order. · The carpet will detect intruders and summon help if you fall. · Lawn sensors will tell you which part of your yard to fertilize. · The electric meter will monitor local power consumption and help you make full use of off-peak rates. · The thermostat will learn your preferences and adjust the climate in each room as soon as you enter. Within 30 years humans will begin augmenting their brains by plugging the power of tomorrow's cellphones directly into their heads. — Shawn Carlson, founder of the Society for Amateur Scientists · Highways will handle three times as many cars. According to researchers at Columbia University, vehicles driven by humans use at best 5 percent of a highway's road surface at any given time. If we let technology take the wheel, we could significantly increase the volume of traffic. In one example, Volvo's semiautonomous road train wirelessly connects a stream of cars to a truck driven by a professional. The self-driving cars mimic the speed and steering of the lead vehicle, safely decreasing the gaps while increasing fuel efficiency. · Farmers will grow caffeine-free coffee beans. Taking caffeine out of coffee is no easy chemical feat, which is why decaf lacks the rich flavor of the high-test stuff. After years of research, Brazilian scientists have discovered a mutant strain of coffee that's naturally low in caffeine. They won't rest until they learn how to remove every last drop of the sleep-retarding stimulant. · Supercomputers will be the size of sugar cubes. The trick is to redesign the computer chip. Instead of the standard side-by-side model in use today, IBM researchers believe they can stack and link tomorrow's chips via droplets of nanoparticle-infused liquid. This would eliminate wires and draw away heat. What it won't do is help you remember where you left your tiny computer before you went to bed.

10 Things That Will Disappear

We will find life beyond Earth. There's a horse race going on right now, and one of those horses is going to cross the finish line in the next two decades. — Seth Shostak, senior astronomer, SETI · A virtual lawyer will help you plan your estate. "I don't mean avatars," Cisco's Dave Evans says. "I mean virtual people—self-contained, thinking organisms indistinguishable from humans." Sounds crazy, right? But surely you've seen the magic of CGI. What's to say you can't attach a

lifelike visage to an interface fronting the crowdsourced wisdom of the Internet? Give it a nice head of hair, teach it how to smile, and you're looking at a brilliant legal eagle with awesome people skills. · Vertical farms will feed cities. There will be 9 billion people on the planet in 2050, seven out of 10 of them in urban areas, and everyone's got to eat. Future food production will depend on farmscrapers that grow pesticide-free crops year-round—making it much simpler to eat local. · Connecticut will feed the world. To keep up with all the hungry mouths, we may just have to rethink food. The folks at tech startup Pronutria claim to have discovered an industrious single-cell organism that converts sunlight, CO2 and water into low-cost nutrients. It works in tight quarters too. Instead of a few thousand pounds of crops per acre a year, we'd be looking at 100,000, according to the company's research. In other words, the planet's protein could be produced in an area half the size of Connecticut. · Scientists will discover direct evidence of dark matter. It may account for 23 percent of the mass in the universe, yet we haven't confirmed that dark matter exists. Why? "It's like a hidden magnet," says Dr. Fred Calef of the Mars Science Laboratory. "You can see what it pulls but can't see the source." Theoretical physicist Michio Kaku believes the proof we seek could arrive within 15 years, helping us to unlock the origins of our universe, and maybe even open the door to another one. · Navy SEALs will be able to hold their breath for 4 hours. Advances in nanotechnology will help us overcome not only illness but also the limits of being human. For example, robotic red blood cells called respirocytes could each hold 200 times the oxygen of their natural counterparts, enabling a man on a mission to, say, hide out underwater for half a day without a scuba tank. · Tuna will be raised on farms. Ah, the bluefin—powerful, dangerous, graceful ... and delicious served raw. Long reproduction cycles and a migratory lifestyle make it hard to tame, though. Pioneering fish farms in Mexico are now raising the species, fattening tons of fish in massive underwater pens. Similar efforts are underway in the U.S., Japan, and the Mediterranean.

2063—2122

· Robots will rule the LV games! China started hosting the International Humanoid Robot Olympic Games in 2010, and inventor Dean Kamen is pushing for high-tech competitors in Rio de Janeiro in the summer of 2016. "The original Olympic skill sets were javelin throws, wrestling, and fighting skills that countries needed for defense," he says. "In the 21st century, sports should require modern skills like programming and mechanical prowess." We say let's get started. By 2100 we hope to design the android version of Michael Phelps. · The Pentagon will say goodbye to large submarines. With the steady improvement in sonar technology, our subs are already hard-

pressed to evade detection. In the future, underwater robots with laser radar or other nonacoustic sensors will make the seas virtually transparent. So how will we deploy our nukes? Hypersonic missiles launched from our own shores will reach any target in the world within 1 hour. We're all gonna die. — MythBusters host Jamie Hyneman

· An ion engine will reach the stars. If you're thinking of making the trip to Alpha Centauri, pack plenty of snacks. At 25.8 trillion miles, the voyage requires more than four years of travel at light speed, and you won't be going nearly that fast. To complete the journey, you'll have to rely on a scaled-up version of the engine on the Deep Space 1 probe, launched in 1998. Instead of liquid or solid fuel, the craft was propelled by ions of xenon gas accelerated by an electric field.

Your Body Will Be Truly Connected

· Doctors will check your vital signs around the clock via tiny sensors. · Stomach chips will monitor your diet to help you lose weight. · Spinal cord implants will reverse paralysis. · Brain chips will let you absorb data while you sleep. · Brain interfaces will help you fully inhabit virtual worlds. · Scientists will map the quadrillion connections between the brain's neurons. Quadrillion sounds like a made-up number, but we assure you it's real. Those connections hold the answers to questions about mental illness, learning, and the whole nature versus nurture issue. If every one of them were a penny, you could stack them and build a tower 963 million miles high. It would stretch past Mars, Jupiter, and Saturn and stop roughly halfway to Uranus. · One of us will celebrate a 150th birthday. Our money's on Keith Richards. Given recent advances in health, technology, and medicine and the rise of genome science, it's only a matter of time until someone gets to blow out all those candles—especially if you toss in a breakthrough on the scale of antibiotics, says David Ewing Duncan, author of When I'm 164. What are your odds of living to see our predictions come true? There are more than 300,000 centenarians on the globe already—and one hearty soul has reached the age of 122.

THE PM BRAIN TRUST

SAYS:

WITHIN 20 YEARS... Self-driving cars will hit the mainstream market. Battles will be waged without direct human participation (think robots or unmanned aerial vehicles). The first fully functional brain-controlled bionic limb will arrive. WITHIN 30 YEARS... All-purpose robots will help us with household chores. Space travel will become as affordable as a round-the-world plane ticket. Soldiers will use exoskeletons to enhance battlefield performance. WITHIN 40 YEARS... Nanobots will perform medical procedures inside our bodies. WITHIN 50 YEARS... We will have a colony on Mars. Doctors will successfully transplant a lab-grown human heart. We will fly the friendly skies without pilots onboard. And renewable energy sources will surpass fossil fuels in electricity generation. WITHIN 60 YEARS... Digital data (texts, songs, etc.) will be zapped directly into our brains. We will activate the first fusion power plant.

And we will wage the first battle in space. WITHIN 100 YEARS... The last gasoline-powered car will come off the assembly line.

http://www.popularmechanics.com/technology/engineering/news/110-predictions-for-the-next-110-years

Mutual funds bounce back in 2012

Sandeep Singh : Mon Dec 17 2012, 03:23 hrs

December, usually a month reserved for congratulatory messages among fund managers was a

disaster in 2011. At one stage 2012 looked set to repeat the feat but it has turned out to be a

surprisingly good change at the end. The strong rally in the equity markets has carried through to

the mutual funds which have bounced back. A majority of the mutual fund schemes have

surpassed the returns generated by the Sensex of 25.6 per cent in the calendar year 2012 (data till

December 7).

A look at the top 10 schemes from among the funds that have assets under management (AUM)

in excess of Rs 1,000 crore shows Indian mutual fund toppers compare extremely favourably

with their peers abroad. The returns are one of the best across the countries, across asset classes.

To get a sense of how the Indian markets performed it is useful to note that the only benchmark

index that has outperformed the Sensex is Dax of Germany, with a return of 27.5 per cent in the

same period. The Hong Kong Hang Seng comes in next with a 20 per cent return. FTSE in the

UK, the Dow Jones Industrial of US and Bovespa in Brazil have generated single-digit return in

the same period while the Shanghai Composite in China has generated a negative return of 6 per

cent.

How do the schemes stack up at the top

A look into the 49 equity mutual fund schemes that have assets under management in excess of

Rs 1,000 crore shows that six of the top ten schemes on performance (in calendar 2012 as on

December 7) belong to Reliance Mutual Fund. While five of the schemes from the fund house

that are in the top ten are diversified schemes, one is a sectoral fund and they all have

outperformed both the Sensex return of 25.6 and the BSE 200 return of 30 per cent in the same

period. Others that complete the top ten are two schemes from ICICI Prudential Mutual Fund—

ICICI Prudential Taxplan and ICICI Prudential infrastructure fund-- and one each from HDFC

MF (HDFC Taxsaver) and DSP Blackrock MF (DSP Blackrock small and midcap fund).

The banking index has been a clear outperformer during the year with a return of 54.9 per cent as

on December 7 and Reliance banking fund has generated a return superior to that of 56.6 per

cent. While Reliance lagged in performance in 2011, experts who have tracked fund houses for

several years now say that over a longer period, Reliance funds show strong performance.

“Reliance funds do very well over the long period of time of 5-7 years. They tend to be a little

inconsistent in patches but do well over a period of time,” said Dhirendra Kumar, CEO, Value

Research. “Reliance Diversified funds are largely multicap and they have exposure to large mid

cap category and there has been a turnaround in that category of stocks.”

Financial planners say that Reliance MF’s schemes lagged in performance significantly over the

last couple of years but have made a smart comeback and they are recommending its schemes to

investors. A fund house that has been a clear outperformer in the past seems to be lagging its

peers in performance this year is HDFC Mutual Fund. While one of its schemes — HDFC Tax-

saver — occupies the fourth spot with a year to date return of 44.5 per cent, two of its flagship

schemes that are the biggest in terms of AUM within the industry —HDFC Equity (AUM of Rs

9,887 crore) and HDFC Top 200 (AUM of Rs 11,591 crore) come at 11th and 31st position with

returns of 37.9 per cent and 29.5 per cent respectively. “HDFC MF has struggled in terms of

performance in 2012,” says Value Research’s Kumar. Market experts say that the fund house has

missed out on momentum stocks. “While it may be their strategy, investors look for returns,”

said a market expert who did not wish to be named.

Sundeep Sikka, CEO of Reliance Capital Asset management says fund houses need to remain

committed for the long-term wealth creation for their investors. “It’s important for investors to

invest with a long term horizon, with fund houses having proven track record over various

market cycles.” said Sikka.

For investors, as new fund offerings on the equity front has turned into a trickle, it might make

sense to look at the existing schemes with an eye on the long-term performance, especially at

schemes that have consistently generated strong returns over an extended period of time.

http://www.indianexpress.com/news/mutual-funds-bounce-back-in-2012/1046127/0

Anewprice index for agri commodities; a Business Standard and Indicus Analytics initiative

>INDICUS PRICE MONITOR

Wheat presents aninteresting picture inits pricemovements. Evenwith bumper cropsand huge stocks,

prices have beenaccelerating throughout.

Mandi prices tracked through the IndicusPrice Monitor show a more than 30%year-on-year (yoy) rise in November.Wholesale price index (WPI) also reflectsthis steep hike in inflation over the year.Over the last five months, the price ofopen market sales to millers has beenraised five times, leading to soaring pricesof wheat. A tight market globally has ledto higher wheat prices abroad. Thoughthere has been slightly delayed sowing,the prospects are bright for anotherbumper crop this year. Given the surplusstock and high prices, the governmenthad so far stayed the proposed 15% hikein minimum support price (MSP). Yet, withhigher input costs, some raise in MSP isexpected; a firm decision on this shouldbe out soon. Despite favourable output,therefore, prices are unlikely to headsharply downward.

The Indicus Price Monitor (IPM), aproduct of Indicus Analytics Pvt Ltd, tracksreal-time wholesale prices for 62agricultural products in more than 3,000mandis. Due to differences inmethodology, the actual levels of IPMdiffer from the corresponding WPI.However, broad trends are in sync. Data as of December 1, 2012

Available at http://www.indicus.net/IndianEconomy/inflation

IIPPMM iinnddeexx aanndd WWPPII

IInnffllaattiioonn iinn IIPPMM aanndd WWPPII (%)

YYooYY iinnffllaattiioonn iinn IIPPMM && WWPPII (%)

COMMODITY FOR THE WEEK

WHEAT

This past year has been one of gloom for India –except, apparently, when it comes to the stockmarkets. As Table 1 lays out, the Sensex has

massively outperformed pretty much all major indices. China’smajor stock market index actually lost value this year; the Sensexgained a quarter of its value at the beginning of this year. It is theconventional wisdom that much of this is because of high foreigninstitutional investments into the Indian market. If so, why?

Table 2 provides part of the answer. In spite of the catastrophicslowdown in growth, India is easily outperforming most of itsemerging-market peers – save, of course, China and the recentbreakout nation, Indonesia. Even the freeze in industrial output,visible in Table 3, does not put it on the top of the list – Brazil’sindustrial output has declined by 3.5 per cent year-on-year. Butthen there’s the high inflation, some might say. True; but, asTable 4 shows, over 2012 so far India’s wholesale price inflationdoesn’t look like too much of an outlier. Russia’s is higher; Brazil’sis close.

Meanwhile, the macroeconomic numbers, scary as they are,

probably aren’t affecting international investors that much,because they’ll be looking at comparative statistics. Table 5shows India’s debt-GDP ratio is well below the US and UK, andeven Brazil. The only way India stands out among emergingmarkets is its fiscal deficit as a percentage of GDP. That’s thus amajor concern – but, again, as Table 6 demonstrates, it’s in thesame ballpark as the US and the UK. And Table 7 shows thecurrent account deficit is not as bad as South Africa’s. Even the rupee, in Table 8, has not swung against the dollar asmuch as have, say, the Indonesian or South African currencies, or even Russia’s.

STATSGURU

Compiled by BS Research BureauStatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines

5: IN THE MIDDLE ON OVERALL DEBTDebtas a percentage ofGDP (%)

Source: Bloomberg

Source: Bloomberg

2: INDIA’S SLOW GROWTH STILL LOOKS GOODQuarterlyGDP growth (September 2012) (YoY, %)

Source: Bloomberg

8: EVEN THE RUPEE LOOKS STABLE IN COMPARISONPerformance of currencies against the USdollar since January 2012 (% change)

BSE FTSE/JSE Jakarta Dow FTSE Brazil Micex Shanghai SE Sensex Africa Composite Jones Bovespa Composite

Russian British Chinese Indian Indonesian South African rouble pound renminbi rupee rupiah rand

1: WHY ARE INDIAN MARKETS BEATING THE WORLD? Performance ofmajor indices (Percentage change since Jan 1, 2012)

Source: Bloomberg

Source: Bloomberg

3: NO HIDING INDIA'S INDUSTRIAL COLLAPSEIndustrial production indices, 2012 (YoY, growth in %)

Source: Bloomberg

7: CURRENT ACCOUNT PROBLEMSCurrentaccountdeficit (June 30, 2012) (% ofGDP)

India China US Brazil UK Russia Indonesia South Africa

India China US Brazil UK Russia South Africa

India China US Brazil UK Russia Indonesia South Africa

Source: Bloomberg

6: BUT AT THE EDGE IN FISCAL DEFICITFiscal deficit as a percentage ofGDP (%)

Russia China Indonesia Brazil South UK India USAfrica

Source: Bloomberg

4: EVEN INFLATION DOESN’T LOOK THAT BADAverage wholesale price inflation over 2012 so far (YoY, %)

India China US Brazil UK Russia Indonesia South Africa

United USA Brazil India China South Indonesia RussiaKingdom Africa