Twin upstarts from Fortazela – A sign of the times to come?

“International governance structures designed within a different power configuration show increasingly evident signs of losing legitimacy and effectiveness”

– Official statement signed by the BRICS leaders

On July 15, 2014, the BRIC countries announced the formation of twin financial institutions at the Fortaleza summit – the New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA). The announcement has been variously received with gushing optimism about the changing world order to cautious questioning of the feasibility of the bank. Considering the wide disparity in reactions, it is instructive to understand the structure, the motivation for setting up and the implications of this newly minted multilateral institution which is being hailed by many as the sign of the times to come.

The “What”

The New Development Bank adds on to the burgeoning list of development banks internationally – a 2009 study from the Association of Development Financing Institutions in Asia and the Pacific estimated that there were 550 development banks in the world.  The NDB (having a $50Bn paid-in capital) aims to fund infrastructure and sustainable development projects while the CRA is $100bn swap line that gives each country an access to emergency supply of paid-in capital. While the initial capital for NDB is being contributed equally by each of founder member countries ($10Bn each), the CRA will have a different set of contributions from each country.

Figure 1

Fig: Initial contributions, Source: Reuters, Government of Brazil

Though the NDB in a section of commentary has been hailed as a possible alternative to the Bretton Woods institutions (World Bank and IMF), its initial capital base is lower than many of the existing multilateral banks.

Figure 2

Source: Market Realist

The bank has been structured to be open to new membership with a caveat that the founding members will hold a minimum of 55% of the voting power all the time. After much last wrangling, the BRICS decided that the bank be based out of Shanghai and while India will preside over the operations for the first five years, followed by Brazil and then Russia.

Why was it set up?

The setting up of NDB has been read as a first step towards the assertion of greater power by the developing countries and towards the breaking of dollar dominance. The NDB is the result of dissatisfaction with the current west-dominated international financial system which has not reflected the rise of the developing countries. For instance, the voting rights in the IMF for the BRICS countries are completely incongruent to the economic heft and the population of these countries.

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Source: Financial Times

There also has been particular frustration in the style of operation of the global multilateral institutions such as the World Bank and IMF which attach sometimes unsuited and unreasonable requirements to the loans and assistance they offer. More often than not, privatization of resources is insisted which results in lucrative contracts for private companies, which are mostly based out of the west. Additionally, the perceived hypocrisy of these institutions while imposing harsh austerity measures on Asian countries after the Asian currency crisis and the acceptance of the lax stance of the European countries after the global financial crisis, served to heighten the antagonism among the developing countries towards these institutions. A more immediate trigger came in the form of rapid exodus of capital from emerging markets triggered in 2013 due to scaling back of the expansionary monetary policy in the US which highlighted the perils of over-dependence on the dollar and monetary policy of the US Fed.

Why does it matter?

The coming together of the BRICS countries to negotiate as significant multilateral institution points to the growing maturity of the bloc. This can be heralded as the v2.0 of the BRICS grouping – a shift from the being a convenient grouping of countries for investors towards tangible institution development. The impact of such a bank can be analysed with respect to 2 dimensions:

  • Global power shifts – The development of a NDB and CRA signals the viability of cooperation among the BRICS countries to come up alternatives if their demands for greater share of authority are not met. As an example, the draft IMF reforms for increasing the vote share of the BRICS countries agreed upon in 2010 is stuck in the US congressional process with no signs of any breakthrough. Furthermore, the CRA mechanism is designed to help the BRICS countries to lessen their dependence on the US Fed and the dollar.
  • Funding for developing countries – According to the World Bank, there exists a $1 Trillion funding gap for infrastructure in developing countries. In this context the NDB will provide an attractive alternative for other developing countries to acquire funds from other than western dominated multilateral institutions. The fact that a BRICS bank aims to make electricity, transport, telecommunications, and water/sewage a priority is important; the demand for infrastructure is expected to grow sharply as more countries transition out of low-income status. In terms of scale, after a couple of decades, if the membership expands along with mobilization of government financing and private funds—the BRICS Bank loans could dwarf World Bank loans. This type of success has been seen with the CAF, which now funds more infrastructure in Latin America than the World Bank and the Inter-American Development Bank combined. Over the long run, this might result in a reduced loan portfolio and consequently lower policy influence of current dominant institutions such as the World Bank. However, for the foreseeable future, given the huge demand-supply gap for financing, NDB will play a complementary role rather than supplementary one. This realization is reflected even in the official responses of the World Bank and IMF, which have welcomed the creation of NDB and CRA.

There are however several potential pitfalls for the success of NDB and CRA. The fairly heterogeneous composition of the BRICS setup – varying from quasi-dictatorial style of functioning of raucous democracy – will impose challenges in reconciling the negotiations to a common set of outcomes acceptable to all. This was already exhibited in the way the first set of decisions on headquarter location and the presidency were taken – at the last moment. Furthermore the range of scale of economies – China’s economy is almost 24 times the size of South Africa’s economy will put strain on the “democratic” nature of the institutions with China naturally wanting to impose itself.  China needs to resist overwhelming the institutions for its own advantage, in order to secure support from players such as India and Brazil.

The institutions born at Fortazela, have the potential to be harbingers of the needed change in the western dominated world of international finance. However, it will take patience and extraordinary maturity on the part of the BRICS nations for these institutions to fulfil their potential.

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Should there be a “Right to Bank Account?”

Financial inclusion (FI) has become one of the top priorities of federal banks and governments across the globe. The issue demands an even greater importance here in India as the financial inclusion situation is grim. Despite being the Asia’s third largest economy, nearly 40% of the people don’t have a bank account. An RBI panel headed by Nachiket Mor, a member of the RBI’s central board, recently proposed a new class of banks, christened as “payment” banks, to be set up to enhance the coverage of financial services in India. This is a step in the right direction and this article argues as to why should the people demand for a “right to bank account”?

Financial inclusion, as defined by Zeti Akhtar Aziz, noted Malaysian economist, is “About providing an opportunity for the world’s 2.5 billion unbanked and financially underserved to participate in the formal financial system…” The global financial crisis of 2008 acted as an eye opener with regards to the importance of financial awareness.  Bringing the “financially untouched” population into the mainstream banking would not only improve their lives, but also bolster the economy.

blg1Source: Livemint

In the absence of financial inclusion, unregulated lending services sprout up. They usually ask for very high interest rates and repayment period is too short for any productive investment. They can get bullish in nature and leave customers to pay through the nose. Kate McKee, a behavioural economics expert, claims that a person caught in the claws of private moneylenders shows declining decision making and crisis management skills. This degrades performance in any profession.

Financial inclusion benefits the economy in multiple ways. It provides an easier way for the state to transfer benefits to people. It will eliminate leakages and curb corruption. Thus, the result would be a reduction in the government’s subsidy bill and putting the public money to more efficient use.

Another benefit is that having a bank account will encourage people to save money, and deposits could be used to extend capital to businesses. Growth in the formal banking sector is known to reduce reliance on “black” money for financing. Availability of affordable and adequate credit from the banking sector is known to boost the entrepreneurial spirits of people.

Achieving inclusion in the country of one billion seems a humongous task, and it indeed is, but as the old saying goes, “where there is a will, there is a way.” Several developing countries have taken innovative measure to address the issues, and the results are stellar. Kenya, for example, has leveraged the widespread presence of mobile phones to introduce a mobile-based financial services system called “M-PESA”. It is used by one-third of their population for cashless transfers, savings, financial transactions, etc. and could be replicated in India.

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M-PESA Model: How it works

Even private lenders can be made a part of the financial inclusion system under strict regulatory control. Brazil has in place a network of 95000 banking agents who have helped pull around 13 million people into mainstream banking. Bangladesh has adapted its regulatory framework to suit the growth of women-led micro financing institutions.

The biggest obstacle to relaxing the norms for banking growth is the fear of banking services being exploited for money laundering or even worse, funding terrorist activities. Financial Action Task Force, an intergovernmental body, was established in 1989 to counter these issues. Mexico has tried to address the issue by having “tiered” regulatory framework. Low-value accounts relax on the background checks but are subjected to more stringent transaction restrictions.

In 2008, more than 80 developing countries came together to form the “Alliance for financial inclusion,” an international knowledge sharing network to discuss and design policies on financial inclusion. Seeing the momentum in world economies towards financial inclusion, RBI acknowledged that it is the need of the hour. Based on the proposals of panels and think tanks, it has taken several steps for the expansion of financial institutions in rural India:

  • No frills accounts: These are the most basic accounts which offer only the basic services. These accounts have zero balance requirements and have helped attract more than 12 million Indians into formal banking.
  • Relaxation of Know Your Customer (KYC) requirements: No frill accounts can be opened up by showing up any one of a variety of photo IDs. For low-risk individuals, full KYC data updating exercise has to be carried out only after every ten years as compared to the norm of five years.
  • Banks at the doorstep: The introduction of information and communication technology, e-commerce, financial inclusion fund and online updates on markets, etc. have brought banks to the doorsteps.

The statistics presented below shows that these measures have achieved partial success in increasing the penetration of financial institutions in rural areas. “Crisil Inclusix Index” is used as a measure of FI. It collates three crucial parameters of bank penetration: branch penetration, deposit penetration and credit penetration. The Index has increased from 40 to 35 in the last five years, but it is mostly high for the states with high literacy. This implies that the poor, uneducated people who truly need an account are still excluded.

blg3Source: Livemint

 Under the recent proposal of RBI, existing banks are going to be allowed to open subsidiaries serving as payment banks. The Panel further proposes to have a universal electronic bank account (UEBA) for every person on the lines of the Unique Identification card scheme of central government.  Experts welcome the Mor’s proposals and believe that the concept of “payment banks” could prove to be a game changer. As Shinjini Kumar, head of banking at PWC India commented in financial express “I definitely think the proposed payment banks are better suited to achieve the objective of increasing penetration compared to the universal banks,”

Financial inclusion of the bottom half of the financial pyramid is an arduous, but crucial task that requires government will, support from leadership across political parties and careful policy crafting by RBI. We have this opportunity of leveraging the dormant potential of the financially secluded section of our economy. Who knows, it may herald a new era of growth and prosperity for all. So yes, it is time for government to give some serious thought to “Right to bank Account.”

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Vaibhav Kumar Singh is a PGP-2 student at IIM Ahmedabad and a member of Consult Club. He did his internship with The Boston Consulting Group. Prior to joining IIMA, he worked as a Software Development Engineer at Microsoft and as a research scholar at INRIA, France. He is a graduate in Computer Science & Engg. from IIT Jodhpur.

Mobile Number Portability: The Hype and the Impact

Mobile Number Portability (MNP) equips customers to switch over to an alternative network service provider without having to change their numbers. MNP was tipped to be the game changer and turn around the competitive landscape of the Indian Telecom Sector. It was launched with much enthusiasm in January, 2011 by TRAI (Telecom Regulatory Authority of India), after a successful model test in Haryana . However the actual customer switch-over rate has remained far below 1% per month compared to  a monthly average of 3-5% in more developed nations notching up only around 109 million MNP applications in the past 3 years. This is a little over 10% of total customer accounts switched in 36 months and is far below the expected pre-launch predictions.

Despite 55% customers expressing satisfaction with their current network provider and 48% over the network quality, there were strong supporting reasons for introducing MNP in the first place.  A Nielsen survey done at the stroke of the launch of MNP in India had revealed high customer interest (~1 out of every 5 customers) in using this facility (refer Chart 1). There were evident customer advantages meant to be seen with this new introduction, namely :

  • Major reduction in switching barrier, especially for customers owning a particularly ‘good’ number which they did not want to change
  • Inducing fair competition among the Network Service Providers (NSPs)
  • Better tariff and promotional plans
  • Improved quality of service

These were supposed to be the new rules of the game for Service providers if they had to retain their customers and poach new ones from other competitors.

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 Chart 1: Source – Nielsen Survey, 2010

Yet the actual impact was far less than originally predicted by TRAI. The reasons for the unexpected low impact are numerous. Researchers claim that higher %age of MNP is an indication of the level of maturity of the market and there is evidence to infer that Indian customers are not very ‘number’ conscious. Pre-paid account users, which form ~97% of all Indian wireless accounts, still exhibit a trend of buying fresh SIM cards (getting a new number) instead of necessarily using MNP. Even though post-paid account users show a better trend in this regard, the number of post-paid accounts is only 3% of the total. Also, data shows that for most of the experienced service providers, the parameters like tariff charges, network quality, value added services, etc. are more or less similar to each other, hence, there is no major value proposition for the customer to make use of MNP extensively. At times, even the network providers are not keen on poaching accounts which are historically low revenue generating.

Telecom Sector Impact Analysis:

Despite the Indian Telecom sector being a primarily pre-paid market, i.e., ~97% share in terms of user accounts, the remaining 3% of Post-paid accounts are extremely important for NSPs as they drive the overall profitability. The advent of MNP has meant that new entrants can capture adequate number of customers by poaching from the incumbent market leaders through offering higher value for price. Hence, customer service, quality of the network, value added services and customized tariff plans are the key to long-term leadership.

The Average revenue per user (ARPU) is much higher for Post-paid customers, hence, the profitability too (refer tables 1 & 2).

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Table 1: TRAI official report, 2013

Table 3

Table 2: TRAI official report, 2013

The Telecom sector in terms of its user account base is declining post the advent of MNP (chart 2), yet the overall revenues and correspondingly ARPU are on the rise (chart 3). This has been a positive for the NSPs as now the cost of issuing more accounts and blocking more numbers has gone down, adding to their profits.

The Telecom sector in terms of its user account base is declining post the advent of MNP (chart 2), yet the overall revenues and correspondingly ARPU are on the rise (chart 3). This has been a positive for the NSPs as now the cost of issuing more accounts and blocking more numbers has gone down, adding to their profits.

Chart 1

Chart 2: TRAI official report, 2013

Chart 2

Chart 3: TRAI official report, 2013

 

 IDEA: a clear winner

The impact of MNP has been best tapped by Idea Cellular and Vodafone, amongst all private and public sector players. Idea Cellular had a net 3.32 million influx of customers while Vodafone registered 2.89 million, in over a year of the introduction of MNP. Customer feedback suggested that it was the network quality and clarity of voice which led them to choose Idea over other NSPs. During the past fiscal (2012-13), Idea has registered the highest growth in revenues, on a percentage year-on-year basis (Exhibit 1). The contribution of MNP can be estimated as (assuming constant trends over last 2 years) = 3.32 * 10^6 * 105 (ARPU) *12 = 418 Crores, in terms of Gross Revenues. This amounts to nearly 229.9 crores (55%), in terms of Adjusted revenues, which is huge.

Attributing to the same benefits, consumer surveys have shown that customers have rewarded NSPs for good customer service and high network quality with competitive tariff plans. The reasons for not switching over to a competitor were dominated by customer satisfaction and brand loyalty (Table 3).

Table 3

Table 3: Paper by Rajesh Yadav and Nishant Dabhade

Similarly, as expected the main reasons for customers who made use of MNP were led by better features offered by competitors and lack of up-gradation schemes for the current service provider. (Table 4)

Table 7

Table 4: Paper by Rajesh Yadav and Nishant Dabhade

Looking ahead:

The next step in this direction from the Government is to provide National level Mobile Number Portability. This will enable customers to retain their mobile numbers as they move from one circle to another when they change states. Thus, not having to be on roaming and yet be able to retain the old numbers could be highly advantageous for such clients. This is targeted for an April, 2014 launch. But the impact seems to be primarily restricted to those people who usually get frequently relocated, which constitutes less than 1% of User accounts per month. Thus, expecting a major overhaul by this next leg of development in the Telecom space is highly unlikely. Hence, despite minor positives for both- customers and NSPs, Indian telecom sector still waits for its real game changer.

Table 4 (Source: TRAI report, 2013)

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Udit Kejriwal is a PGP-2 student at IIM Ahmedabad. An Aditya Birla Scholar and a runner-up at the ‘Dewang Mehta Best Student in Management’ competition nationally, Udit interned with McKinsey and Company for his summers. A former General Secretary Technology at IIT Kharagpur, Udit worked for 2 years as Quality Assurance Manager with Procter & Gamble on completion of his Bachelors in Mechanical Engineering. He is a passionate dancer, a long distance runner and a die-hard sports enthusiast.

Open Source: A paradigm shift for the IT Industry

Open Source is the biggest disruptor the software industry has ever seen and it will eventually result in cheaper software and new business models…

-Gartner

Gartner’s predictions now suggest that in coming years, OSS’s impact on application software will cross $19 billion, with a five-year CAGR of 44%. With the Open Source Initiative (OSI) organization and thousands of developers worldwide backing OSS, its impact on the $170 billion IT industry needs a closer look.

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Major players in the open source space

Open Source Software (OSS) is collaboratively developed computer software with its source code made public. Over the past decade, OSS has seen rapid growth in the industry owing to the price, reliability and flexibility benefits it offers. The growth of Open Source Software (OSS) has altered the fundamental nature of the industry in a true sense as an increasing number of business models are switching to OSS. It has given rise to major implications for the IT industry while also carving out niche segments in the industry such as Open Source Consulting etc.

THE GROWTH STORY

So why has OSS grown exponentially? What factors have driven software giants to using as well as publishing open source?

The biggest factor that propelled OSS onto the main stage was the cost advantage, but, contrary to popular belief, it is not the only benefit that organizations derive from OSS:

Security – Linus’s Law (named after Linus Torvalds, Linux creator and OSS pioneer) states, “Given enough eyeballs, all bugs are shallow”. OSS offers enhanced security by leveraging the strength of its developer base to quickly identify and fix bugs.

Quality – OSS offers immensely better quality of code. Imagine thousands of developers constantly striving to innovate and contribute to an OSS versus a handful of developers shipping out a licensed software package.

Trial & Support – OSS also offers great trial and support options. As the code is free, organizations can try it out at will, and with hundreds of communities and online forums of open source developers, support is never far away for the users.

Flexibility – Other benefits come in the form of amazing customizability, freedom and flexibility the code offers. Organizations typically tweak the code with minimal effort to best match their requirements, a relatively well-known example being that of Goobuntu, a ‘long term support’ version of Ubuntu developed and used in-house by Google.

Hybrid Business Models

In addition to pure open source companies, the growth of OSS has been fueled by proprietary software companies pursuing a ‘hybrid’ business model. There have been numerous instances of software giants open sourcing some of their products: Adobe open sourced its Flex tool while Yahoo did so with the Flickr API. This has lent credibility to the OSS bandwagon and prompted firms and venture capitalists to invest in open source. In September 2013, IBM announced a gigantic $1 billion investment in the Linux platform.

MAJOR ISSUES

OSS has been able to penetrate almost all sectors of the software industry, ranging from ERP to Server OS and has made inroads into the public consumer segment as well (as depicted by the graph). While OSS continues to grow unbounded, it becomes critical to address the problems associated with OSS. The biggest gray area for OSS is legal uncertainty. There are unaddressed issues with the interpretation of open source licenses (such as GPLv2) which use an array of loosely defined terms such as ‘derivative work’.

Open Source Software Usage Adaption (%age)

Open Source Software Usage Adaption (%age)

Another problem lies in the management of OSS on a large scale. Many companies build their core business models on top of an open source code or platform. This necessitates the formulation of a sound usage policy, failure of which could hugely devalue the product. This was the case with Cisco’s $500million acquisition of Linksys where the Free Software Foundation successfully claimed release of open source based elements of Linksys. Other trivial issues include limited user-friendliness and lack of ‘formal’ technical support. The growth of OSS is sustainable only if these issues are eliminated, otherwise, the software industry will soon be entangled in a web of lawsuits, plagiarism and uncertainty.

WHERE IS THE FUTURE?

Three distinct schools of thought from the software world have sparked the Open Source vs. Free Software vs. Closed Source debate for paving the growth of the industry. While advocates for Closed Source bank upon benefits such as saving intellectual property and minimizing competition, they restrain innovation and reusability for the industry. On the other hand, Free Software offers unmatched cost benefits and a ‘morally right thing to do’ argument, while suffering from loopholes such as poor quality and low accountability. In such a business environment, open source attempts to pave a middle way promising highly flexible, reliable code at minimal cost. But with the open source issues remaining unaddressed, the promise might not always be realized which means that the three-fold software debate continues to heat up.

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Abhinav is a PGP 1 student at IIM Ahmedabad and a member of the Consult Club. He holds a Dual Degree in Computer Science from IIT Roorkee and has worked at Adobe for 10 months before coming to IIM Ahmedabad. He will be interning with the Boston Consulting Group. He is passionate about reading, traveling and playing volleyball.

Hello? Rural India calling!

The advent of mobile phones in the past decade has led to an undeniable transformation of the landscape of the world. It has touched the lives of everyone – from the banker to the boatman. As the cellular phone continues its surging progress towards ubiquity, we shall examine how it is affecting the lives of the Indian farmer, and changing the face of agriculture in rural India. 

Mobile Telephony in Agriculture

In the field of Information and Communication Technology for Development, or ICT4D, mobile phones are touted as a potent tool for development. The sheer scale of global adoption of mobile phones in the last decade perhaps lends credibility to this fact. Even within India, the last decade has seen a steep rise in mobile phone subscriptions, with a wireless teledensity of 70.57%, as of January 2013. With the saturation of the urban market and the rising popularity of the Bottom of the Pyramid concept, mobile phones have penetrated deep into rural India.

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With its ability to offer wide and rapid outreach across a large geography, it is no surprise that mobile phone technology has its applications in the field of agriculture. Enabling higher speeds of information exchange, it brings farmers, organizations and markets closer to each other, with the direct fallout of greater transparency and leveraging power to the usually downtrodden farmer.

Case Studies: Mobile-based Services for Farmers

The opportunities of using mobile phones in agriculture are immense, and subsequently, there have been a plethora of mobile-based services targeting farmers. Some are listed below:

Reuters Market Light, a subsidiary of Thomson Reuters, provides personalized agricultural information over mobile phones to the farming community, to a cumulative subscriber base of over 1 million across 13 states.

Ekgaon Technologies, started by an Ashoka Fellow, offers a service called ‘OneFarm’ in Gujarat, Rajasthan and Tamil Nadu, that provides soil-specific nutrient recommendations to the farmer through an automated system in local language via mobile phones.

Recently, ITC Ltd. Launched an interactive mobile telephony system called ‘Namma Sandesh’, that provides crop advisory, market prices, weather forecast and local news to tobacco and ragi farmers in Karnataka.

The Benefits

The introduction of mobile phones has changed agriculture in multiple ways.

First, it has helped farmers make more informed choices. It has helped connect farmers separated by vast distances, enabling the sharing of knowledge on best practices. Moreover, tailor-made weather forecasts add weight to his crop decisions.

Beyond this, it has enhanced his access to markets and mandis previously out of reach. No longer can the middleman use information asymmetry against the gullible kisan (farmer) – information from markets around the world is now at his fingertips.Beyond these, mobile telephony has helped in rapid transfer of information across vast distances. This is critical because a few hours can make all the difference during a pest or disease outbreak.Finally, it has helped empower the farmer with information, opening new doors in terms of opportunities and knowledge.

The Challenges Ahead

While there has been significant contribution of mobile phones in rural India, there are many hurdles to be overcome.

The major hurdle is simply technological and financial considerations. To develop infrastructure for improving mobile networks in rural India would require the willingness of companies to invest for low initial returns. The financial burden of setting up infrastructure could be reduced by sharing of networks by carriers.

While mobile connectivity is high in rural India, mobile data (or GPRS) is yet to catch up. This restricts farmer-oriented services largely to text SMS or voice as the mode of communication.

This restriction is compounded by the low levels of literacy, and tech-literacy in far-flung areas. As voice is expensive, most services focus on text SMS-based service delivery. However, many handsets do not support Indian language text and English is little-known in villages.   

There is also the issue of the quality of content delivered through various services. From the content to the delivery, there are many challenges faced in designing effective services for the Indian farmer. Innovation and creativity are much-needed, and the content has to be packaged for the local socio-cultural setting.

As a final word, it would be wise to remember that mobile telephony, just like any technological innovation, is not a panacea. Its interactions with the social fabric are complex. For example, in a typical rural family, the head of the house owns the phone – a subtle reinforcement of existing power hierarchies.

Thus, mobile telephony has rewritten the story of the rural farmer. It has shrunk the distances separating him from the rest of the world and brought information to his fingertips. It has brought services that reduce the risk of crop damage or failure, and improved his access and aspiration levels. There is, however, a long way to go. Technological, infrastructural, content-related and social challenges need to be overcome.  

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Girish is a PGP-1 student of IIM Ahmedabad and a member of the Consult Club. Prior to joining IIMA, he graduated from the Indian Institute of Technology, Madras with a B.Tech in Mechanical Engineering. He loves music, reading and discussions, and is passionate about the social sector.

More power for your Electric Car

The Electric Car is hardly a new invention. In fact, they were very popular in the 1920s when Internal Combustion (IC) Engines suffered from drawbacks like excessive noise, vibration and the high cost of fuel. However, they left the limelight after the rise in popularity of IC engines due to the discovery of oil blocks in the USA and improvements in IC engine design.

However, the resurgence in popularity of EVs, fuelled majorly by oil shocks and environmental movements warrants some attention. Even though the Electric Vehicles need a lot of factors working in their favor for them to gain an important position in the automobile market today, we feel there is one aspect which lies at the heart of the issue – the power system.

 The power system – the bottleneck in EV performance:

The performance of batteries and charging infrastructure are responsible for a majority of the bottlenecks facing the rapid acceptance of EVs.

Recharging time: Larger and more powerful electric vehicles require more time to charge – and though the batteries with greater capacities are available, they cost a lot more and take very long to charge.

Battery Lifetime: The cost of batteries increases exponentially with capacity and hence raises the cost of owning an electric vehicle as compared to a fossil-fuel powered vehicle

Range Anxiety: Electric Car owners are plagued with the fear that their battery will run out of power and they will be left stranded. Lack of sufficient charging infrastructure is the core reason for such anxiety

The Battery – A tradeoff between cost and capacity

Batteries are probably the most expensive component of EVs which increase the upfront cost of ownership. Thus, managing battery economics is the first major piece of the puzzle.

Here we will look at a metric called the payback period for the battery since it is the most relevant and commonly used measure of economic competitiveness. The Payback period in our context simply calculates the time taken for an Electric Car’s operating efficiencies to recover the upfront payment for the battery

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This payback period should obviously be less than the normal lifetime of the vehicle for it to make economic sense for the consumer. The figures below do not indicate such a possibility – the current payback period is 12 years, which means we are not there yet; but considering the steady decline in this metric from 35 years in 2007, it is not a distant dream. Moreover, Government subsidies make the deal even sweeter by reducing the upfront cost and hence the payback period.

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Charging Infrastructure – the antidote to Range Anxiety

Another way in which this equation can be improved for the customer, is by reducing the capacity of a battery, while also keeping the ‘Range Anxiety’ at bay – this can only be accomplished by widespread charging infrastructure.

There is a clear tradeoff between the fixed cost of charging equipment and time taken to fully charge a battery; and even with fewer cost constraints, technology to quickly charge the EV has not penetrated the market yet.

Charging Stations Vs. Gas Stations:

There are two major reasons why charging stations are unattractive as compared to gas stations

Firstly, the time taken for charging a battery can be 30 minutes for even the best charging stations. Compare this to the 10 odd minutes taken by even the least efficient gas station and we see we have a problem.

In addition, there is no standardized offering with respect to charging infrastructure – a Tesla station cannot charge a Nissan Leaf EV for example. This lack of standards in the industry is multiplying the cost of charging infrastructure for the society.

Residential Charging:

Regular chargers can take 4-5 hours on an average to charge the EV, which means overnight charging is the best option. Even with such a high duration, the cost of the charging point is as high as USD 3000 which can be prohibitive for certain customers.

Distance between public charge-sites:

Another way to solve the range anxiety problem is to have charging stations at regular intervals, so that I am not far away from a charge-site when the battery is running out of charge.

An easy way to make preliminary calculations is to assume that car should be able to recharge when it exhausts, say, 80% of the charge it gained in 15 minutes of charging (the usual time one would want not mind waiting at a charge station).

Using LA county as a test example, we observe that a charge point is needed every 10 miles. But with only 75 sites as opposed to the requisite 350 odd sites, the current infrastructure is hopelessly inadequate. Without major investments in more powerful chargers or in increasing the frequency of charging infrastructure, the problem of range anxiety is difficult to alleviate.

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Alternatives to charge stations:

Two interesting charging mechanisms have evolved to counter the conventional charging stations:

Battery Swapping: This revolutionary method simply replaces a discharged battery with a charged one – taking far less time than even a conventional gas station. However, this technology has to deal with obvious issues like lack of standardization, high capital costs, getting small refills and questions of ownership of the batteries. Better Place –  a company which tried to use this as part of their business model files for liquidation recently – clearly indicating that battery swapping still has a way to go before it can become mainstream.

Wireless charging: Using EMF coils set below the road or dividers, EVs can be charged wirelessly, while on-the-go. This solves a lot of issues, including the standardization issue of battery swapping, but high capital costs (estimated at a million dollars for a 5 Km stretch of road) can make this unviable in the short term. In addition, there is no business model to recover the cost from the consumers yet and till such a time, charging stations may be the only way.

 EVs despite their many advantages, thus, will be restricted by battery costs and charging infrastructure, before it can truly compete with existing gas-powered vehicles.

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Sahil Patwa is a PGP 2 student at IIM Ahmedabad and a member of the Consult Club. He spent his summer at the Boston Consulting Group developing a growth strategy for an Industrial Goods major. Before coming to IIM Ahmedabad, he worked as an Associate Consultant at Ernst & Young and did a brief stint at a boutique consulting firm. Sahil holds a B.Tech in Mechanical Engineering from IIT Bombay

The Internet of Things: Too Far Away?

“The Internet of Things” has been a topic of interest in the technology circles for as many as 15 years. Like “Web 2.0”, “the Semantic Web” and “Cloud computing” it is a term that excites keen interest. But how much is hope, and how much, hype ?

The phrase “The Internet of Things” is generally accepted as being proposed in 1999 by Kevin Ashton, who was seeking to apply RFID to manage Procter & Gamble’s supply chain. The Internet of Things is understood by many people as a glamorous way to describe something that has always existed: sensors connecting “inanimate” machinery to a computer, maybe with a network of such sensors all connected to each other thrown in.  Other consider it to be the inclusion of RFIDs on every “thing” – from books to cars to cows – so that those “things” become capable of being tracked and we can easily capture things that we are interested to know about them. Another view is that “smart” grids and “smart” houses form the sum total of the Internet of Things. Right?

Not really. While it incorporates all of the above, the concept of The Internet of Things (IoT) involves much more than that.

Let’s first start with why it is called The Internet of Things. Why not just “connected devices”? Or M2M (machine-to-machine) communication?

At its most ambitious, it is supposed to emulate the way the Internet (IP) connects hundreds of thousands of smaller networks (our “traditional” IP is the Inter-network, or a network of networks). The idea behind the Internet of Things is this:  not only should ordinary objects that we don’t normally visualize as generators of information be connected to each other, many smaller networks of such objects should be able to “talk” to each other. Potentially, one should be able to connect all the objects on the planet to each other. Whether that is necessary of course is a different matter. However, it does point to the fact that the number of such devices in any network will be extremely high. (Consider for instance an electrical grid with thousands of “smart meters” on the network).

Considering its scale, therefore, The Internet of Things will be possible only because of developments in a number of fields, from nanotechnology to wireless sensors.

Applications

Potential applications include:

  • Energy – “Smart” grids leading to more efficient energy use and billing
  • Transportation – Transportation solutions that could track traffic conditions and ease congestion;  automatic emergency handling services (for example, eCall is an European initiative to deploy devices in all cars that will automatically send an emergency notification, data on the seriousness of impact, and coordinates to the emergency services in case of an accident )
  • Household applications – Smart homes
  • Healthcare – Care of the elderly and patients (For instance, implanted devices that can inform a caregiver automatically in case of a fall, or a drop in vital levels)
  • Environment– Monitoring pollution levels in water bodies
  • Security
  • Industrial applications

Developments

A number of ventures claiming to be associated with the “Internet of Things” have grown in the years since 1999, when the idea was first presented, and the present. Most of them revolve around specific products or services such as Netatmo’s “connected weather station” which allows users to track temperature and air quality inside their homes via sensors which are internet-enabled. Withings, a Paris-based company which raised $30 million in venture capital funding in October 2013, produces items such as wireless-enabled weighing scales and other consumer health devices, while Invoxia’s main offering is an audio device for iPhones/Android. In a very different field, Camgian Microsystems is notable for manufacturing hardware products (chips and sensors) that are usable in security and warfare applications. The Mississippi-based company has partnerships with DARPA, Boeing and Honeywell among others.

Unfortunately, most of these products are disparate in that they do not connect to the wider environment, or to other low-level devices (except phones and tablets). An ideal “Internet of Things” application would be, for instance, a weather station that also took into account your current health data (measured through another monitor and transferred to the weather station) and the current outside weather conditions and advised you to wake up and get more exercise (via a connected alarm clock/phone).

Thus, what is urgently needed is a set of common standards so that multiple different companies can build different products that are able to talk to each other. The plethora of platform providers currently being marketed for different uses makes it unlikely that this will happen any time soon.

The Way Ahead

An October 2013 Forbes article notes that the Internet of Things is definitely not here yet, but holds out hope for it by emphasizing the need for “open APIs and common standards”.  Besides this major challenge, other issues to be tackled include potential energy sources (especially important in view of the large number of devices on the network), sensor costs, as well as data privacy, security and ethical concerns.

The International Telecommunications Union in a 2005 report held out great promise for IoT’s applications, predicting everything from smart beverage machines to electronic wallpaper that changes according to one’s mood.  Sounds like a science fiction novel? As Arthur C. Clarke said:

“Any sufficiently advanced technology is indistinguishable from magic.”

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Krittika is a PGP-2 student at  IIM Ahmedabad and a member of the Consult Club. She is interested in technology and learning. She holds a B.E in Information Technology from Netaji Subhas Institute of Technology, Delhi.