"There Are Only 2 Mistakes One Can Make Along The Road To Truth; Not Going All The Way, & Not Starting." - Buddha

Hot Soup

Peshawarites have had it pretty rough with the weather this summer. Every city in Pakistan seems to have gotten a balanced amount of rain within a reasonable time span except around here. The weather has been nothing short of sweltering for weeks - especially for those of us too rich to turn on the air conditioning - let the record state, that I neither confirm nor deny that I'm speaking from personal experience! Anyway, luckily for financial professionals, there hasn't been much activity on the international commercial front (after the Brexit disaster) that bore much relevance to the Pakistani economy in general or the Khyber Pakhtunkhwa (KP) economy in particular. Until now. Apparently, the summer vacation is over & small but important developments are unfolding thick & fast.

"The Road To Success Is Always Under Construction." - Lily Tomlin

First came the news that the KP Provincial Government has decided to send a delegation to Beijing in August to discuss KP economic interests & priorities in connection with the China Pakistan Economic Corridor (CPEC). It was promptly followed by a sudden (but reportedly planned) business visit to China by Punjab Chief Minister Shahbaz Sharif. Some analysts interpreted CM Sharif's trip as an encouraging sign that the KP delegation is so thoroughly prepared that he felt insecure lest his constituency/province falls by the wayside in the course of the distribution of the profitable contracts that are expected both during & after the construction of the Corridor. (Of course, it's equally possible that the constant reminders of possibly pointless London sabbaticals hanging in the home atmosphere may have prompted the need for a change of air - nobody can be absolutely certain).

Admittedly, the positivity generated by the expected KP delegation visit to China (date currently unspecified) was somewhat marred by the media announcement that The Department For International Development (DFID) had been caught (allegedly accidentally) funding subversive activities in Haripur, Hazara (among other places).

The reason the locals were worried was that being legally found guilty of "An attempt to transform the established social order & its structures of power, authority, & hierarchy through a process by which the values & principles of a system in place are contradicted or reversed." (courtesy Wikipedia), may upset business relations with the DFID &, by extension, our British friends.

But, as it turns out, such fears were misplaced. The British Council has graciously stepped in to the DFID-shaped breach to teach what the DFID forgot in terms of attention to detail so as to prevent underlings from plotting conspiracies against the host nation, to the Members of the KP Provincial Assembly. The press statement announcing the MoU between the BC & KP brought about a huge sigh of relief, that business would be able to continue unhindered on the road of progress. If Mr. Jim Booth (British Council Acting Country Director) had consented to it, many Peshawar commoners would have been prepared to kiss his hands with gratitude!

"If You Don't Know Where You Are Going, Any Road Will Get You There." - Lewis Carroll

But, there is a somewhat-disconcerting question still lingering on the horizon: Something called an "Accountability Movement" has been announced for August 7, 2016, by a rather-chatty local politician. In a reportedly uncharacteristic twist, it will not be inaugurated in the Pakistani Federal Capital Islamabad (where the loquacious guy actually lives), but from KP instead. However, there is no information about what this activity actually entails, which begs the question: Will it have a disruptive effect on the concentration levels of the KP delegation set to discuss the KP portion of the Corridor in Beijing? Speaking on behalf of the wage-earners, free-lancers, traders, land-owners & law-abiding citizens of KP, I sincerely hope not.

From London To Baku & Back

The Not-So-Friendly Skies

On March 15, 2016, British Airways (BA) announced that it will be discontinuing its flights from London to Baku (capital of Azerbaijan) by the end of next month (April, 2016); the last flight will be on April 29, 2016, after which BA will not offer any flights between London & Baku. While that doesn't mean Britishers or Azerbaijanis who wish to visit each other's countries will have to hitch a ride on a banana boat - other airlines will presumably continue to offer comfortable travel options - it does beg the question why BA is walking away from this market segment at this point in time?

Azerbaijan has just signed at least 2 high profile commercial agreements during the last week alone. Silk Way West Airlines & Malaysia Airlines Berhad (MAB) have just inaugurated a Block Space Agreement (BSA) on a twice weekly route to & from Kuala Lumpur & Amsterdam via Baku Heydar Aliyev International Airport in Azerbaijan. In addition, SOCAR & Zenith Energy Company of Canada have signed an agreement on production sharing, restoration, development & exploration at the Muradkhanli, Jafarli & Zardab oil fields.

Obviously, it isn't the lack of prospective passengers that has convinced BA to discontinue the London-Baku route. Some might conclude that the BA pedophile pilot compensation payments have depleted BA's coffers, but considering the documented victims are from Africa, it is highly unlikely that the "undisclosed amount" would be anywhere near the high payouts that are generally the norm in the Developed World. BA hasn't announced any replacement routes either. The reason would have to be something else.

The BA press release concerning the London-Baku route didn't furnish a reason for the move. That means, those of us who are interested in the airline sector - in which BA occupies a fairly important position - will have to look over the potential explanations for ourselves.

1. Cash Flow Problems?

Stock tracking website Live Charts UK (www.livecharts.co.uk) offers a wealth of information on British Airways (symbol: BAY) financial activities. But the point I found stunning was that the last change in the share price took place on January 26, 2016! Has anyone ever heard of a stock price remaining unchanged for nearly 2 months? So far as I know, it's a miracle if a stock price remains unchanged for 2 minutes. How is this possible? Either Live Charts UK has made a serious mistake in its calculations...or BAY is secretly drowning in red ink & is trying to buy itself enough time to somehow resolve whatever problem is plaguing the company.

After all, Pakistan International Airlines (PIA) registered a slight hiccup & the Pakistani Finance Minister hit the speed dial button to call the International Monetary Fund (IMF), which instantly called time of death & demanded that PIA be privatized forthwith - unnecessarily, as it was proved in the end, but the IMF response itself might be enough to make the harried executives of BA a bit nervous. What if the IMF decided that BA is actually not "too big to fail"?

2. Price Wars?

The plunge in oil prices since 2014 has been a blessing for the airline sector, as Cathay Pacific was recently discussing in the media. Surprisingly, BA, which was considered an award-winning airline by Skytrax World Airline Awards (www.worldairlineawards.com) in years gone by, has tragically declined in the latest statistics.

The Top 10 Airlines of 2015 are:

1. Qatar Airways
2. Singapore Airlines
3. Cathay Pacific Airways
4. Turkish Airlines
5. Emirates
6. Etihad Airways
7. ANA All Nippon Airways
8. Garuda Indonesia
9. EVA Air
10. Qantas Airways

The Top 10 Low Cost Airlines of 2015 are:

1. AirAsia
2. Virgin America
3. Norwegian
4. easyJet
5. Jetstar Airways
6. AirAsiaX
7. Indigo
8. WestJet
9. Jetstar Asia
10. Scoot

Is it possible that the shrinkage of BA's routes is because it doesn't have the impressive ratings to market its services to as wide an audience as in the good old days?

3. Image Issues?

BA has maintained a more-or-less respectable record of smooth flights. The last incident of note took place on September 8, 2015 when Flight 2276 (a Boeing 777-236) aborted take-off at Las Vegas McCarran International Airport due to engine failure. The fault lay in its left General Electric GE90 engine, which led to a fire. Fortunately, the aircraft was successfully evacuated & all 157 passengers & 13 crew escaped the aircraft alive. But, if anything, that accident would be the responsibility of General Electric (GE) in that its engine was defective.

But then again, GE has a top-of-the-line public relations team because word was that the Fukushima Daiichi Nuclear Disaster in Japan on March 11, 2011, was actually caused by 6 GE boiling water reactors that failed to deliver on quality when the Tohoku Earthquake (& resultant tsunami) took place. But the only party to be punished for the accident was the plant operator, the Tokyo Electric Power Company (TEPCO).

International Airlines & Global Security

The "Richard Burton" Business Model

Sir Richard Burton was a 19th Century British explorer who produced English translations of Asian myths & legends, such as "The Thousand & One Nights". Most of his literary works were almost entirely dependent on the business of slipping in & out of places where he wasn't necessarily welcome or even legally permitted to visit. That adventurous approach increased the attraction of his publications tenfold. But the idea of flouting the law is no longer considered sexy; the only time people invite sympathy for trying to slip across borders is if they faced dire trouble in their own countries; other than that, it is completely unacceptable.

During the last week, there have been discrete whispers about certain unidentified foreign airlines having repeatedly played fast & loose with the rules that require foreigners to actually be carrying visas when they arrive in Pakistan; turns out that Dean Jones wasn't the only gentleman who left his papers behind & was still welcomed aboard a plane flying to the Land Of The Five Rivers. This trend has become unsettling enough that the Pakistani authorities were compelled to levy a modest fine upon said airlines & remind them not to be naughty again.

That is all well & good, but what most financial analysts would like to know is the names of the recalcitrant firms, so as to make a more accurate assessment of their future financial prospects. Sadly, that list has yet to be released to the public. Under the circumstances, the only thing that can be done is compensate for the absence of vital information by perusing the headlines on the foreign airlines that operate regularly in Pakistan. Given below is a list of the top 5 foreign airlines that are making the rounds in the financial papers these days.

British Airways & The Pedophile Pilot

British Airways (BA) is the flag carrier as well as the largest airline in the UK, based on fleet size. When measured by passengers carried, it is second-largest in the country, behind easyJet. The airline is headquartered in Waterside near its main hub at London Heathrow Airport. BA is a founding member of the Oneworld airline alliance, along with American Airlines, Cathay Pacific & Qantas. British Airways merged with Iberia on 21 January 2011, formally creating the International Airlines Group (IAG), the world's third-largest airline group in terms of annual revenue & the second-largest in Europe. IAG is listed on the London Stock Exchange & in the FTSE 100 Index.

British Airways recently agreed to pay an undisclosed amount to East African children who were sexually abused by its pilot, Simon Wood, 54, from Potters Bar in Hertfordshire. Wood got hit by a train & died in August 2013, 11 days before he was due to appear in a UK court charged with abuse in Africa & the UK. BA denies liability but agreed to compensate the abuse victims.

Cathay Pacific & The Oil Plunge

Cathay Pacific is the flag carrier of Hong Kong, with its head office & main hub located at Hong Kong International Airport. Its wholly owned subsidiary, Dragonair, is also headquartered in Hong Kong. In 2010, Cathay Pacific & Dragonair carried nearly 27 million passengers & over 1.8 million tons of cargo & mail. The airline was founded on September 24, 1946 by Australian Sydney H. de Kantzow & American Roy C. Farrell, with each man putting up HK$1 to register the airline. As of October 2009, its major shareholders are Swire Pacific & Air China. It is reciprocally one of the major shareholders of Air China.

According to the latest news, the airline hedged its fuel requirements at prices higher than those prevailing in the spot market, causing it to report losses from the contracts, much along the lines of what happened in 2008 & 2009 when the sudden plunge in oil prices resulted in several loss-making fuel contracts for Cathay Pacific & Singapore Airlines, among others.

Saudi Arabian Airlines & The Mid-Flight Pilot Death

Saudi Arabian Airlines (Saudia) is headquartered in King Abdul Aziz International Airport, Jeddah & is the flag carrier of Saudi Arabia. The airline is the third largest in the Middle East in terms of revenue, behind Emirates & Qatar Airways. Saudia is a member of the Arab Air Carriers Organization. The airline joined the SkyTeam airline alliance on 29 May 2012.

On March 3, 2016, a Saudi passenger aircraft pilot, Captain Walid bin Mohammad Al Mohammad died minutes before landing a plane in the Gulf Kingdom forcing his co-pilot to take over. Captain Walid was trying to land at King Khalid International Airport in Riyadh when he suffered a massive heart attack. Realising that something was wrong, his co-pilot, Rami bin Ghazi took over & successfully managed to land. He radioed for medical assistance but it was too late because Captain Walid had apparently died instantaneously.

Swissair & The Cancellation Of Balkan Flights

For many years, Swissair was the national airline of Switzerland. Successor airline Swiss International Air Lines was founded on April 1, 2002 on the base of former Crossair. Today, The SAirGroup company still exists & is in the process of being liquidated. Swiss International Air Lines was taken over by the German airline Lufthansa in 2005.

Swiss International Air Lines will suspend flights from Geneva to Sarajevo next month & is likely to do the same with its Geneva-Belgrade route, just a few months after terminating services between Zurich & Ljubljana. Furthermore, the Swiss carrier's subsidiary, Edelweiss Air, will suspend its seasonal summer flights between Zurich & Podgorica, launched last year, & has terminated ticket sales on the route. It comes following Swiss' aggressive expansion into the former Yugoslavia in the summer of 2015 when it launched services from Zurich to Ljubljana, Zagreb, Sarajevo & Podgorica (operated by Edelweiss), as well as flights from Geneva to Sarajevo & Skopje (also operated by Edelweiss).

Thai Airways & The Resumption Of Russian Flights

Thai Airways is the flag carrier airline of Thailand. The airline has its corporate headquarters in Bangkok, & operates primarily out of Suvarnabhumi Airport. It is a founding member of the Star Alliance. The airline is the largest shareholder of the low-cost carrier Nok Air with a 39% stake, & it launched a regional carrier under the name Thai Smile in the middle of 2012 using new Airbus A320 aircraft.

Encouraged by good results in the final quarter of 2015, Thai Airways has decided to resume flights to Russia. The Moscow-Bangkok service will be restarted in October 2016. The airline had discontinued its Moscow service in March 2015 as Russian tourist numbers to Thailand fell on account of a depreciated ruble.

Dieselgate: What Lies Ahead For VW?

Volkswagen Headquarters (Wolfsburg, Germany)

The GM Renaissance Center (Detroit, Michigan)

Introduction

Volkswagen Group is facing a seriously lengthy run of bad luck; Germany is suing, the Italians are conducting raids, the European Parliament is disgusted & even mild-mannered Pakistan is wondering whether it should blacklist the company or pretend it didn't notice the screaming headlines in the international media. The situation is deteriorating so fast that the 20% drop in the share price & the 5 billion pounds sterling set aside in the name of damage control, is expected to prove grossly insufficient to quell the storm.

So Bad, So Fast

According to Wikipedia, a summary of VW's sorry situation would be as follows:

"The Volkswagen emissions scandal (also known as Dieselgate) began on 18 September 2015 when the United States Environmental Protection Agency (EPA) issued a Notice of Violation of the Clean Air Act to German automaker Volkswagen Group. The company had intentionally programmed their model year 2009 through 2015 turbocharged direct injection (TDI) diesel engine so that US standards nitrogen oxides (NOx) emissions were met only during laboratory emissions testing. NOx emissions during driving were up to 40 times higher. The EPA classified this programming as a defeat device, prohibited by the Clean Air Act. An estimated eleven million cars worldwide, and 500,000 in the United States, included such programming.

These findings stemmed from a study on regional emissions discrepancies commissioned in 2014 by the International Council on Clean Transportation (ICCT) summing up the data from three different sources on 15 vehicles. Among the research groups was a group of five scientists at West Virginia University, who detected additional emissions during live road tests on two out of three diesel cars. ICCT also purchased data from two other sources. They provided their findings to the California Air Resources Board (CARB) in May 2014.

Volkswagen became the target of regulatory investigations in multiple countries, and Volkswagen's stock price plunged in value by a third in the days immediately after the news. Volkswagen Group CEO Martin Winterkorn resigned, and the head of brand development Heinz-Jakob Neusser, Audi research and development head Ulrich Hackenberg, and Porsche research and development head Wolfgang Hatz were suspended. Volkswagen announced plans to spend US$7.3 billion on rectifying the emissions issues, and planned to refit the affected vehicles as part of a recall campaign. The scandal raised awareness over the higher levels of pollution being emitted by all vehicles built by a wide range of carmakers, which under real world driving conditions are prone to exceed legal emission limits. A study conducted by ICCT and ADAC showed biggest deviations from Volvo, Renault, Jeep, Hyundai, Citroën and Fiat. A discussion was sparked that software-controlled machinery will generally be prone to cheating, and a way out would be to make the software source code accessible to the public."

A Flash In The Pan

By VW's own estimate, it will take a minimum of three years to regain its market position after this scandal. So, in the meantime, who will step up to the plate & fill the VW-sized gap in the international auto market?

General Motors has had a rough year, with all the malfunctioning vehicles it has had to issue recalls for. So imagine everyone's surprise at the fact that GM's stock is actually clawing its way up the chart instead of trying to break its fall on the way down! The company is making a genuine comeback, even though brakes & ignition switches are still making headlines (& not in a good way). While the secret to GM's rejuvenation has not been disclosed by the company, most experts believe that it is no coincidence that GM is number three in terms of world auto market share - just behind VW, which at last count, held the number two position behind number one, Toyota.

Is GM angling to dislodge VW? Nobody knows just yet, but it could if it really wanted to for the following reasons:

1. 396 facilities on 6 continents (2014 figure)
2. 216,000 employees (2015 figure)
3. 9,714,652 vehicles manufactured per annum (2013 figure)
4. Total assets of US$177.677 billion (2014 figure)
5. Annual revenue of US$155.929 billion (2014 figure)
6. Global market coverage (except Cuba, Iran, DPRK, Sudan & Syria)

If the answer to the afore-mentioned question proves to be in the affirmative, these 6 factors (plus the fact that practically everyone in the world knows GM by virtue of the brilliantly-planned product placement approach applied in the Transformers film series) are likely to prove very useful to GM.

Telecom Tussles: BlackBerry Limited Versus Telenor Group

The PTA Ban On BlackBerry Enterprise Services

In a somewhat surprising move, the Pakistan Telecommunication Authority published a press statement on Friday saying that BlackBerry Enterprise Services are going to be permanently banned in Pakistan from November 30, 2015. For those who prefer to stick to the simpler things in life - such as the on-again-off-again cellphone service - BlackBerry Enterprise Services is an encrypted email system mostly used for corporate communications.

Important Questions

The first question that the analyst community would ask pertains to the effect the new PTA policy is likely to have on corporate activities in Pakistan; the answer would be: absolutely none. The essence of business communications in the East is the importance of being able to assess a person's intentions & potential from his or her expression. All the encrypted emails, video conferences & phone conversations in the world cannot replace the timeless value of being able to look into the eyes of an ally...or an enemy. As confirmation of this deduction, the KSE hit an all-time high right after the Eid holidays.

The second question would relate to the effect this policy is likely to have on BlackBerry Limited. French anthropologist & ethnologist Claude Levi-Strauss once said, "The wise man doesn't give the right answers, he poses the right questions." The real question is who is BlackBerry Limited's competitor in Pakistan? Everybody knows about the Canadian company's woes at the hands of international competitors like Google's Android operating system & Apple's iPhone, but global assessments are essentially the sum of various national-level statistics. So, who does BlackBerry have to contend with in this country?

A proper understanding of the question would require a brief overview of BlackBerry Limited's company statistics. BlackBerry Limited has been doing very poorly in recent times. The latest figures for its revenue, total assets & total equity have dropped. Its stock price has plummeted a horrifying 30% in the last 3 months alone. The plucky little company that made a splash in Pakistan a few years back by adopting a unique mass marketing strategy - it negotiated bargains with the administration of the leading schools in Pakistan to distribute BlackBerries to the students - is facing a very bleak future.

Identifying The Competition

Sun Tzu wrote in his landmark book The Art Of War, "If you know your enemies & know yourself, you will not be imperilled in a hundred battles; if you do not know your enemies but do know yourself, you will win one & lose one; if you know neither your enemies nor yourself, you will be imperilled in every single battle."

That means the operative question is who starts investing in new furniture as soon as somebody gets evicted from his house? Only Time will tell what is the correct answer, but Telenor announced a US$30 million investment in a solar energy back-up plan to power its Base Transceiver Stations all across Pakistan, just days before the PTA policy change went public. The winds of change are obviously blowing in favor of Telenor as the appreciation shown by the US-administered Universal Service Fund amply demonstrates.

In general, one wouldn't expect BlackBerry Limited, a Canadian telecommunications equipment company founded in 1984, to be facing competition from Telenor, a Norwegian telecommunications services company that opened its doors in 1855. But I guess this story shows that you never know what's around the corner, so always keep your eyes & ears open.

Airbus Versus Sikorsky - Acquire Or Expire!

 

Airbus SAS: Overview

I personally have a lot of respect for Airbus. As a child, I spent plenty of time on planes that took me & my family all over Pakistan. Therefore, much like every frequent flyer in this country, I knew the cardinal rule of Pakistani air travel: Fokker flights were so turbulent that most people reached their destination half-dead from airsickness & Boeing planes were cramped & stuffy; but Airbus flights were a rare & precious joy - comfortable, spacious, airy cabins & seats that didn't feel like the electric chair.

Once I grew up & started understanding international commerce, my respect for Airbus grew even more. Despite not having the Hollywood appeal of American companies like Boeing & Lockheed Martin, it has managed to maintain a workforce of over 58,000 people, net annual sales of US$175 billion & has even recently bagged business contracts in China & India. One thing that both Europeans & Asians agree on is that there is no better plane manufacturer than Airbus.

The MRH90 Taipan Debate

However, Airbus has recently hit a very noticeable bump in the road: the Royal Australian Navy has announced that, after conducting the necessary tests, it has been proven that the MRH90 Taipans tend not to function reliably in strong wind conditions (as is common aboard ships at sea).

As it turns out, this is not a new issue: according to various think tanks, including the Australian Strategic Policy Institute (ASPI), this flaw has been an issue since Australia first introduced the MRH90 Taipans in 2005. ASPI & others go on to assert that the only reason that Australia has continued to stick with the Taipans, is because Airbus provides a sizeable number of jobs to Australians via its manufacturing facility in Brisbane. Opponents of this approach say that the only way to assure the efficiency of the Royal Australian Navy's maritime missions is to place safety statistics before employment figures & replace the MRH90s with Sikorsky's Black Hawk helicopters.

Sikorsky Aircraft Corporation: Overview

Sikorsky, on the other hand, could really use the boost that an Australian defense contract would give it. Its business model is actually as good as it was when Russian-American aircraft engineer Igor Sikorsky designed his flagship product, the Sikorsky R-4, in 1942, & it currently employs over 15,000 people while making net annual sales of US$7.5 billion; but the slump in oil prices (& exploration) that began in spring 2014, has badly compromised the company's bottom line.

Despite being the manufacturer of cash cows like the Black Hawk (the chopper of choice for the US Military) & Marine One (the US Presidential Helicopter), Sikorsky's financial condition has so deteriorated, that it has even begun to negatively affect the profitability of its parent company United Technologies Corporation (UTX), to the point that UTX's share price has been slowly circling the drain ever since oil prices started falling last year.

UTX, which employs over 211,000 people & made net annual sales of US$65.1 billion, has formally announced that it can & will rally from the setback of the last 12 months; but it can no longer afford the drain on its resources that Sikorsky is causing & so it is going to either sell or spin off its helicopter business. According to an official press statement from UTX, the final decision on the choice between a sale or a spin-off will be finalized by the end of this month.

Spin-Off Or Sale?

The dilemma lies in the fact that on one hand, a sale will cost UTX shareholders only US$0.10 per share in 2015 earnings, but it will be accompanied by a hefty tax payment; on the other hand, a spin-off would not incur any tax, but it would shave off US$0.20 per share in 2015 earnings.

In case UTX decides on a spin-off, the top candidate (so far) is Textron Inc. It is considered a direct rival to Sikorsky & is approximately double Sikorsky's size & value - it employs over 30,000 people & made net annual sales of US$12 billion. According to many analysts, the merger of two (bitter) rivals would not be viable under normal circumstances, but US legal experts say it is possible if the concerned parties make use of the "Reverse Morris Trust" provision in US corporate law, which is defined by Investopedia (investopedia.com) as follows:

"A tax-avoidance strategy, in which a corporation wanting to dispose off unwanted assets can do so while avoiding taxes on any gains from those assets. The Reverse Morris Trust starts with a parent company looking to sell assets to a smaller external company. The parent company then creates a subsidiary, & that subsidiary & a smaller external company merge & create an unrelated company. The unrelated company then issues shares to the shareholders of the original parent company. If those shareholders control over 50% of the voting right & economic value in the unrelated company, the Reverse Morris Trust is complete. The parent company has effectively transferred the assets, tax-free, to the smaller external company."

If, however, UTX decides to take the sale option, there are several potential bidders: the current list consists of Lockheed Martin, The Boeing Company & Airbus SAS.

Why Airbus?

Airbus shares have been on a steady decline since the last 3 months. If the Australian issue is not settled quickly, it is reasonable to assume that Airbus stock is going to lose further value. Therefore, the most sensible move Airbus can make is to convince UTX to take the sale option & outbid Lockheed Martin & Boeing to acquire Sikorsky. If Airbus can secure ownership of Sikorsky, it will be able to retain its Australian clientèle in the most efficient way possible: by profiting from giving the customer what he wants.

Social Interactions In The Internet Age

Safety Measures Versus Extortion

Security policies in Pakistan are tough. There is always some new blockbuster legislation just around the corner that serves to confuse some & allow others the chance to pick a few pockets before the legislation fizzles out (usually because it wasn't properly-researched in the first place). Nowhere is this more obvious than in the ICT sector. Everyone understands that things are always clunky in the beginning, but cell services & the Web have been available freely in this country since at least fifteen years - so how long does it take to get past the beginning? Even busy financial professionals like me have to stop & clear up some confusion or misconception every now & then. Case in point, let me tell you what I've had to put up with during the last few weeks alone:

The DSL Debacle

First, my uncle's DSL connection went belly-up for the hundredth time &, unlike previous instances, hasn't been repaired until the publication of this post. I found it very trying because most of my business is dependent on having an Internet connection. After some suspense, I threw in the towel & got myself an Evo 3G Wingle stick - which proved a whole new problem because when my father couriered it to me via TCS, it got delayed because somebody kept shooing the courier away from the gate of our Peshawar address by saying that the only person who lives here is my uncle & so the package should simply be returned! But anyhow, that is a story for another time.

The Cellphone Crisis

Next - on the same day I finally got my Evo stick - somebody got my cellphone service from Ufone blocked! We bought the SIM over a decade ago & it is my official contact number for all my family members & business connections. But back then, SIM policies in Pakistan were the same as the rest of the world & SIMs didn't necessarily have to be registered to the user. Most folks reasoned that if SIMs can be cloned, good old-fashioned police work would still be needed to track a criminal, so why bother millions of innocent subscribers? But I guess Heraclitus was right: Only change is constant.

Now, when the registration circus came to town, I was extremely busy with another assignment & figured I'd attend to my SIM registration when I had time. My father however, got a spurt of enthusiasm & without consulting me first, told my uncle to get it registered on his name (his reasoning was that he is in Rawalpindi with my brother & my uncle is posted in Peshawar these days) in order to get it functional quickly. I grumbled a little but family tradition is family tradition & so I decided to be accommodating. Anyway, I found out about the blockage the next day when I tried to text my father. I called the helpline & was informed that my uncle had got it blocked the previous day because he suspected that it had been "stolen or misplaced"! I told the tech that he was my uncle & how could he even know whether it was stolen/misplaced or not since he had never used it! But rules are rules. So, I had to tell my father to drop everything & go tearing away to the head office in Islamabad! The official explanation provided there was the same. My father called my uncle who denied having done any such thing but when my father said that in that case, he was going to file a formal complaint for harassment & fraud, my uncle pleaded with him not to do that just yet...& my SIM was functional shortly after.

The Attention-Starved Stalker

After that, I hoped (against hope) that I wouldn't have to deal with another cellphone crisis, especially since some jerk in the neighborhood has probably gotten his hands on a jammer & occasionally interferes with my Evo signal. What other explanation could there be that my Evo signal gets blocked, I lodge a complaint with PTCL, it gets okay for a few minutes & then the cycle begins again?

However my wish to be allowed to work in peace was not to be. Some lunatic has started calling me on my cellphone nearly every day since the last week or so. Considering that he or she never texts to explain what they want, I suspect it might be a stalker. Ordinarily, I would have told my father or my uncle in Karachi to call whoever it is back & ask them what is the problem. But nowadays, security policies dictate that anyone found calling "questionable" numbers will instantly be considered a "terrorism suspect"; & despite the "SIM Registration Drive", there is no directory from which to find out anybody's cell number like there has always been for landlines. Consequently, in a last-ditch effort, I am posting the stalker's cellphone number online with the request to please stop bothering me & find a healthier way of getting attention.

0301-6276881

The "Etisalat Bubble"

The Importance Of Information

April 20, 2015 was a landmark day in the history of Pakistan. It was the day that the China-Pakistan Economic Corridor (CPEC) was made official. Not only was that agreement a milestone in the history of the Pakistan-China Brotherhood, it was also the day when Pakistan officially became a member of the global business community, instead of being viewed as a barely-noticed "failed state" cowering on the sidelines. It is not possible for any human being to be 100% sure of what the future holds, but the CPEC is a step in the right direction when it comes to ensuring the welfare & security of the people of Pakistan.

However, as in everything in Life, there is a catch. From the beginning of time, the most important factor in deciding whether any given dynasty or civilization flourished was the speed with which information could be conveyed from one person to the next. History is filled with examples of successful rulers who based their administrations on the strategic & prompt spread of knowledge, people like Qin Shihuang or Ashoka Maurya. Even the British, who came to India in search of commerce & knowledge, lost no time in repairing & upgrading the dilapidated transport & communication systems of India after the 1857 War.

Information & Internet Accessibility

The Corridor constitutes a very important step towards development; but as the Chinese Government itself firmly states, the Internet is a vital part of any successful post-2000 enterprise. What started out as a US DARPA project to facilitate communications between intelligence personnel in the 1960s, once commercialized & globalized, has become the backbone of 21st Century commerce & development. The authorities in Pakistan are considered to be the slowest among the 4 nations that constitute the Indian Subcontinent (Bangladesh, India, Pakistan & Sri Lanka) to catch on to new trends, but despite that, Punjab Chief Minister Shahbaz Sharif has declared Internet access so important that he has ordered free wi-fi hot spots to be set up at every bus station in Punjab Province.

PTCL is the single largest provider of Internet-related services in Pakistan. According to Market Law experts, the only reason Etisalat (the major shareholder in PTCL) has not been hit with an anti-monopoly lawsuit by the Competition Commission of Pakistan (CCP) is because the Pakistan Government is still a minority shareholder in PTCL. Otherwise, several of its competitors could have built a pretty strong case of unfair market advantage against them in court - especially since a number of the other brands haven't currently received permission to cover places as central as Peshawar (capital of Khyber Pakhtunkhwa Province), leaving PTCL as the only viable option.

The Khyber Pakhtunkhwa Dilemma

Taking Khyber Pakhtunkhwa Province as an illustration, PTCL doesn't even offer its full range of services there. Despite the fact that Islamabad (the national capital) is just a stone's throw away, the best option is PTCL's exorbitantly-priced DSL connection. PKR 2,500 per month! Nearly half the legally-mandated minimum wage of Pakistan! How does one reconcile the UN's human right to knowledge with the price of the most efficient way to remain informed?

But Pakistanis are naturally mild-mannered. What would have had the citizens of any respectable Western country up in arms, doesn't even draw a whimper of complaint here. People simply shrug & say that unaffordable services just means that they need to cut down their expenses, e.g. food, clothing & shelter, & save more for whatever they want. But, when it comes to PTCL's Internet issues, monopolization & over-pricing are just the tip of the iceberg.

My brother & I were born in Peshawar. However, for reasons too lengthy to discuss in this post, the last time I was here was when I was a child 20 years ago. My mother & I came to Peshawar a little over a year ago because I have business in Khyber Pakhtunkhwa. In the past 1 year alone, PTCL's DSL connection to our family house here has broken down around once every 3 to 4 months - & each time I inquire as to the nature of the problem, I am told that some mid-level employee was "playing" with the equipment & "mistakenly" disconnected our link. After that I get an apology coupled with the arrival of a repairman & am assured that "it will not happen again"...& then, it happens again. Thrice this year alone, the second time on June 2 (to be eventually fixed - after an eternity of being put on hold by the PTCL helpline - on June 3 at 1600 hours) & the third time on June 4 (& hasn't been fixed until now, which is why I had to get my own PTCL Evo Wingle service). And the latest explanation from PTCL? My uncle is getting the connection (which is on his name) sabotaged himself, which is why they are compelled to close down my complaint without repairing the fault! This is horrifying in & of itself without mentioning the fact that my uncle is considered a rather important Khyber Pakhtunkhwa official. My sympathies to those subscribers who are private sector professionals (like me).

Potential Investments & Official Priorities

Google recently held its first conference in Peshawar. That means a global company has come to the conclusion that there is a sizeable potential market for IT consultants & software experts in the city. This is a golden opportunity for the Khyber Pakhtunkhwa IT sector. But Time waits for no man. If the IT regulatory authorities do not spruce up Internet availability in Khyber Pakhtunkhwa, Google & other potential investors will lose interest & go elsewhere. If that happens, the local tabloids & talk show hosts will spend the next several months wringing their hands about not getting a fighting chance to bring Khyber Pakhtunkhwa to the same level of development as Punjab or Sindh. Terms like "discrimination" & "injustice" will promptly become the most popular buzzwords of the year. But such chit-chat generally means nothing when it comes to business.

The Corridor is coming. That is a fact of life. Thankfully, the business model for it is based, to a great extent, on the private sector. But the authorities are actually as invested in its success because many of their loved ones are members of the private sector &, once they retire, they will join the private sector, too. If they don't pull themselves together & establish their sense of commitment & the level of their competence while they can, they will not only undermine the progress of development (to a limited extent), but they will also lose credibility - the only qualification that matters in the private sector & the one commodity that can't be bought for all the gold in the world.

The Ultimate Compliment: Nokia Versus Huawei

In daily life, the symbol of power & influence is to be "unchallenged". But in the business world, the ultimate compliment is when a prospective competitor makes a financial decision that actually puts downward pressure on its stock price, just for a chance to reduce your market share. The very attempt to challenge your position or block the achievement of your objectives is the most credible confirmation that you have become a force to be reckoned with.

Huawei has just received such a compliment from the Microsoft/Nokia alliance. Was the compliment promising enough to merit increased investment in Huawei's future (both as an investor & as a consumer)? Let's take a look at the investment landscape & find out.

The State Of The Finnish Economy

Georg Franz Stockmann established the Stockmann retail store in Helsinki in 1862. It went on to become the largest retail chain store in Finland, Denmark, Iceland, Norway & Sweden. It was one of the crown jewels of the Finnish economy...until sales crashed, forcing it to conduct a massive downsizing operation & close down a number of its branches both at home & abroad this year.

According to international analysts, the fault does not lie with Stockmann management, but with the Finnish economy. It never recovered from the 2008 Financial Crisis, & is still in the depths of recession nearly 5 years later. Unemployment is currently staggering at 8.5% (latest figures); the budget deficit is over 10% higher in 2014 than it was in 2013. The biggest blow to the economy came in the form of the bankruptcy of the Nokia handset business.

As long as there is life, there is hope...but the majority of Finns think that, unless the Government of Finland comes up with a solution soon, the economy is pretty much "Finnished"!

Nokia Acquires Alcatel-Lucent For US$16.6 billion

So imagine every stock analyst's shock when the news broke of Nokia's acquisition of French telecom firm Alcatel-Lucent for a respectable US$16.6 billion in stock! Not even a full year ago, Microsoft announced its acquisition of Nokia's handset division & went on to discuss the various measures it would have to take in order to drag the struggling business out of the bankruptcy abyss. Nokia was such a mess that most analysts were convinced that the recovery process would take at least 3 years (best case scenario)...& considering Microsoft's lack of experience in running a telecom business, most said the acquisition was more a desperate-times-desperate-measures strategy for Nokia, than a well-thought-out plan.

This opinion is borne out by the following facts: Alcatel-Lucent's stock price has dropped over 1%, Nokia is down over 0.5% & Microsoft has lost nearly 2%...this week's last trading day alone!

Huawei Launches 2 Flagship Smartphones In London (P8 & P8max)

Huawei, on the other hand, is riding the wave of enthusiasm for smartphones. 2014 revenue (US$46.515 billion), operating income (US$5.521 billion), profit (US$4.498 billion), total assets (US$49.997 billion) & total equity (US$16.138 billion) are on the rise & it currently employs over 150,000 people globally. Huawei is China's largest telephone network equipment maker & the world's largest telecom equipment maker.

In addition, it has just launched 2 new smartphones, the P8 & the P8max, in London this week. It is very early as yet, but the majority of the technical reviews that have come in so far, are quite positive as to price & user experience.

Verdict

Therefore, even though there are unsubstantiated rumors in the Pakistani media that Huawei may also be involved in the investigation against PTCL for mislabelling its telecom imports (either to evade taxes or to bring in banned signals equipment), I think that investment in Huawei shares or products is likely to be a profitable step for the investor & consumer public in general.

3...2...1...Gentlemen, Stop Your Engines!

Cellphones: Engines Of Growth

According to the latest figures, Pakistan has a population of 180,854,781; until last week, there were a total of 140,000,000 cellphones in use. The coverage, according to these statistics, was 77 connections per 100 citizens. When it comes to landlines, PTCL has issued a total of 6 million connections so far, which comes to 3 connections per 100 citizens. According to the latest figures, over 30%, or approximately US$2 billion, of the foreign direct investment that comes to Pakistan is intended for the communication sector - & this spike in interest in Pakistani investment ventures came after cellphones were introduced in the country around the turn of the century. The Information & Communication Technology (ICT) industry currently nets approximately US$3 billion per annum & is expected to cross the US$10 billion mark by 2018.

Things were looking very positive for the ICT industry & the economy in general - until April 13, 2015. On that Monday, approximately 12 million SIMs were blocked. In a few seconds, nearly 10% of the law-abiding cellphone subscriber market was shut out, in the name of national security.

When it comes to life in the Developing World, nothing is perfect. In terms of cell service, cellphone batteries frequently had to be replaced, voice quality was unreliable, texts were slow, signals were jammed in honor of nearly every public event & holiday; but people still had the assurance that when all was said & done, they would still have the option to communicate long distance with family & friends, without having to rush to the nearest Public Call Office.

Past Experience

But this isn't the first time that cellphones were blocked to see whether cell service has a causative link to criminal intent or psychopathy in general. The last time this experiment was carried out was during the 2008 Financial Crisis. Considering that the blocked SIMs were quietly re-activated without any fanfare after a few months, it is assumed that no such link was found. Or perhaps the headlines in every major newspaper about the possibility of getting up to 6 Computerized National Identity Cards (CNICs) per head (for a price), triggered a flash of insight. But the experiment did cause countless people plenty of inconvenience during the application period.

When it was over, the positive thinkers told themselves that now that the authorities had satisfied their curiosity & documented the experience for posterity, the common man would not have to contend with this source of botheration a second time. But, in an odd interpretation of the Circle of Life, here we are again!

Future Economic Ramifications: PTCL & The Banking Sector

The PTCL is under the microscope these days on a series of charges related to importing signals equipment deliberately mislabelled either to avoid paying a higher amount of tax, or to conceal the real purpose of the imported equipment. If proven guilty, the costs are expected to be huge. PTCL's most profitable venture is its landline business. The SIM blockage project will definitely increase the importance of telephones, which were becoming increasingly irrelevant in the last few years.

Banks, especially brands like Allied Bank Limited & Askari Bank Limited, which are facing fraud investigations or shrinking customer bases, will take on renewed importance, because the increasingly-popular mobile banking market is expected to take a noticeable hit from the new policy.

Future Economic Ramifications: The Cell Service Providers

Assuming this policy is here to stay (this time), it spawns a number of very important (& currently unanswered) questions:

1. "To err is human." (Alexander Pope)

Every policy is supposed to have a shelf life, during which its efficacy is judged: what happens if (as most legal experts predict) SIM blockage is as ineffective an anti-crime measure this time as it was the last time?

2. "Everything has a price." (Harry Browne)

Each cellphone service provider is issued a specific quota of numbers they sell to their subscribers; if 12 million of those numbers are going to be blocked, how will the authorities compensate for that reduction in their legally-permitted number of customers?

3. "There is only one boss: the customer." (Sam Walton)

Each cell service subscriber in Pakistan spends at least US$2 per month on cell charges. Many spend far more than that, but a minimum figure will come to US$24 million per month! This is counting the minimum prospective outgoing calls & texts from the now-blocked SIMs. The figures for incoming calls to these SIMs have not been included. The only firm that can be counted on to look beyond the expected revenue losses is China Mobile, because of the special brotherly ties between Pakistan & China. But what about the others?

Unless the strategy to guarantee the security of the citizenry is adjusted soon, the result will be that national security may or may not improve, but economic security will definitely deteriorate.

A Tale Of Two Courier Services

 

The History Of Courier Services In Pakistan

For 35 years after Pakistan was formed, it had no courier services. The country was introduced to the concept for the first time when 2 entrepreneurial brothers Brigadier Sadiq Nawaz Awan & Mr. Khalid Nawaz Awan established the DHL franchise in the country in 1982. Details on the nature of the agreement between DHL & the Awan brothers are not publicly available, but since it was a franchise, DHL must have made them shareholders in its Pakistan operations.

However, something must have happened because, barely a year later, Mr. Khalid Nawaz Awan had broken away from his association with DHL to form Tranzum Companies & Services (TCS) in 1983. TCS went on to become DHL's biggest competitor in the Pakistani market & eventually left DHL behind to achieve the position of Pakistan's biggest courier service firm. According to the latest statistics, TCS has a market share of 45%, followed by DHL with 39% & the remaining 16% divided between several smaller firms.

For all intents & purposes, this state-of-affairs would have continued for the foreseeable future, if it weren't for the dark cloud that has suddenly appeared on the horizon for TCS. According to the Pakistani news media, Prime Minister Nawaz Sharif has ordered the Directorate of Inter-Services Intelligence (ISI) to investigate an as-yet unspecified smuggling charge against TCS & a Dubai-based electronic appliance chain called Smart Zone. Smart Zone, not being very well-known in Pakistan & having a diversified portfolio of investments, may be able to weather the storm by concentrating on revenue generation in other countries. But speculations are rife that if this investigation results in a question mark on the business credibility of TCS, it could cost the company a large chunk of its market share.

FedEx Acquires TNT For US$4.8 billion

TNT is a 4-year-old multi-national courier service based in the Netherlands, that was formed from a 65-year-old Australian courier service named Thomas Nationwide Transport. Its prospective revenues were expected to be so high that a year after its formation, in 2012, United Parcel Service (UPS) offered it an M&A deal. However, EU authorities didn't allow it to go through because they feared the merger may result in a monopoly in the European courier service market.

Apparently, FedEx (UPS' biggest competitor in the United States) had been watching the negotiations carefully & has learnt from UPS' mistakes. It has successfully closed the deal to take over TNT, without upsetting the EU authorities, for a tidy US$4.8 billion. This deal is expected to shift market share away from UPS & DHL (the current market leaders in Europe) & towards FedEx (due to the customer good will that TNT is expected to bring to the partnership).

Effect on UPS & DHL Stock Prices

As was to be expected, the announcement of the successful FedEx-TNT agreement has resulted in a small but noticeable drop in UPS shares at the New York Stock Exchange (NYSE). While it is obvious that a company as globally well-established as UPS is not circling the drain, but the blow of this development has definitely left a mark.

The odd part is that DHL (listed as Deutsche Post on the Xetra in Frankfurt), which had started to fall, suddenly spiked! Every stock analyst was highly intrigued (& confused) because DHL has a smaller market portfolio than UPS. So how did it manage to stay stable? The question was answered when the news on the TCS investigation in Pakistan hit the headlines.

Changes Afoot In The Pakistani Courier Services Market?

According to independent investment analysts, it is clear that unless TCS manages to clear its name (& doesn't take too long about it), its revenues & market share are going to start sliding. DHL's international shareholders apparently believe that either TCS will not be able to quash the investigation, or that it will take very long to do so. The next step is that DHL will step into the gap left by TCS, replacing it as Pakistan's top courier service. Therefore, they continue to invest with great confidence in DHL.

As to the rest of us, both TCS & DHL are currently very reliable names in the courier service industry. Whoever may win the top position in the market, it will be very educational to watch the developments.