Sunday, August 31, 2014

Avoid the Mistakes of the Bull Market Rally.

Nifty is at 8000 levels, GDP growth is around 5.7% and the optimism in the Indian economy is galloping. Among all these I find a couple of strong negative battles which we all will be facing in the next 6 months and we all need to take preventive steps. We all know about the Bushan steel matter hence it goes without saying that we need to do cherry picking in the bull phase of the economy. From my memories of 2003-2007 I would like to accentuate couple of areas where I find that history is one the way to repeat. Hence I would like to provide the following advice to my investor friends who are getting ready for the Historic Bull Market Rally of the Indian Equity Markets. We all know that when bully rally begins we take adrenaline based investment rush decision which is very less based on factual. Drive the investment car but not being drunk.

When bull rallies happen Midcaps and specially the small caps make a Kangaroo style jumping in prices and tends to give stupendous returns within a very short span of time. We have seen historically that small caps are the most dangerous segment of investments in equities. Companies fails in fundamentals and financials but only the price movement’s makes the investors a bee line behind these stocks. You will find among your friends and family members, a numerous numbers of investors who have burnt their fingers by investing in small caps-getting into the trap of short term lucrative returns. It is advisable to invest in large caps and quality midcaps rather getting in to trap of these small cap risky investments.
Over the last decade Indian equity markets have matured enough in terms of knowledge and understanding the basics of investments. Hence it high time that one should remain rigid in terms of going through the rules of investments in equities. Learn and apply stock valuation rules like Price to Book value, Price to earnings ratio, Sales growth, business fundamentals, promoters and share holders’ creditability etc. These things are often missed out when a bull rally happens but one must remember that once the rally gets stuck our adrenaline rush gets a break. Don’t blame the broker or the broking company. It’s the investor’s duty to take care of his investments and not to take adrenaline based investment decisions. If you don’t understand the business, don’t know anything of the company but based on meager words and price appreciation you take up the decision of investments well be ready to face the dark nights.

Greed is good but too much sweetness makes it bitter. Well I have twisted and turned the English proverbs since that’s what we tend to do while doing investments in Bull Run.  The current market is already flooded with FPO, Fixed Deposits, IPO and NCD issues. In my recent interaction in some states I found that investors are stuck with investments in some NCD and Fixed Deposit where the investor’s money has gone for a wild toss. The current situations of the Indian corporate are very bad since defaults on loans are at the peak of Indian economy. In the last five years, long-term debt of 966 NSE-listed companies has simply soared, growing by about 30 per cent annually. Infrastructure, iron and steel, mining and textiles sectors had the most stalled projects and these sectors financial conditions are extremely in bad shape. Hence alternative sources of raising capital are now widely available. Investors should be very careful about picking up investments in NCD, Fixed Deposits and IPO. Once should avoid the heard of adrenaline based investment rush. Read the business, financials and credit quality of the papers being offered for subscription. In 2004-20011 we have found both sides of the Primary market where investors made millions from FPO, IPO and NCD but at the same time they burnt their double hands in the same rush.  Check the credit quality of the papers and don’t opt for anything below AAA of AA+ rated by Crisil & ICRA. Read carefully the offer document which might seem like a boring task but it’s highly required since that’s the only place where you get all the details.  Don’t forget the historic failures of these types of investments.
Many investors tend to act smart by taking risky calls for the short time having the mind of playing smart with the market and doing timing of the market. They always pronounce that timing of the market is key to make profits. Well these investors are the ones who once get caught in the game will never see in the market again and they cry foul even when someone is playing correctly. We should not forget that market is smarter than your intelligence level. Never do timing of the market. In this globalised inter connected equity markets its quite risky to take these market timing based calls. Avoid these death traps and invest for long term. Remember a peaceful sleep is more required than sleepless nights.
As equity markets are in the bull phase we will find that we liquidate our investments from other asset classes and invest 100% into equity so that one can become super rich within a very short span of time. This is one of the biggest blunders being committed by the investors. Asset allocation should remain intact and one should not violate the same. Rational changes are to be dropped and only objective based and age based allocation changes should be adopted. Diversifications have been the rule and that should be followed. Remember that the greed based on which you are taking the 100% plunge in direct equity investments might turn out to be 100% loss once the equity markets takes a toll. Increase your allocation but maintain the asset allocation and abide the rules of the same.

In these bull markets we find many new investors who have just joined the job and have started earnings. They have dreams in their eyes of making and building their own investments. These are the ones who are exploited most for investments.  Well they should be careful about investment decisions. For them the simple rule is that what you don’t understand and you don’t have guts and faiths don’t invest. Re-validate every information and statements which leads you for investment decisions. Understand the fundamentals of investments in equities and then take the decision of investments. Park 30% of your salary in investments in equities and prefer to invest in large caps and that too in Monthly basis rather than one short. This will help you to gain confidence as well as develops a disciplined investments approach for your financial planning. In my next article I will exclusively cover this segment.

 Chit funds and other lucrative offers are going to catch the markets in these bull rally and they are mostly focused towards the rural class of investments. Well avoid these traps. Enough hands have been burnt. Opt for only those investments which are recognized by SEBI. The thumb rule to remain safe in these bull rallies is that what you don’t understand and what you are not convinced don’t opt that way. Try to collect information and do cross verification about the investment options which seem to be tempting. Ask your friends and relatives and also do some research at your end while taking plunge in these options.


Remember it’s your hard earned money and you must be aware about its investments. If you are not careful now and acting blindly be ready to pay the hefty premium of losses later on. Drive the investment car but not being drunk.

Saturday, August 30, 2014

JADAVPUR UNIVERSITY-INDIAN STUDENTS BEATEN AND SINGAPORE INVITED

Very Soon we will read that rape and molestation are now common but protest against the same has never been such painful as it happened in JADAVPUR UNIVERSITY-WEST BENGAL INDIA . On 17th August 2014 at Jadavpur University one of renowned  University of India and West Bengal has created the history of students being beaten like dogs and cats. These students are the future of the Indian economy and these students have been beaten for making a non-violence movement against the protest and justice of a girl student being teased and molested inside the campus.

This is an account of the events of last night in Jadavpur University, Kolkata, were students sitting in on a peaceful protest against university authorities inaction on a recent complaint of sexual harrassment. What followed (an attack from two fronts, by police and goons affiliated to the Trinamool Congress) brought back memories of the many times that students have been attacked mercilessly in JU. Currently, around 40 students have had to receive medical attention.

Recently the Chief Minister of West Bengal went to Singapore to get business and investments into West Bengal. Now if the state condition is like this where police and special combat force uses martial arts on Engineering Students against a protest where the respect of a women is at stake. Now tell me how much save are the investors of Singapore and other places.

The below pictures and footage are enough to depict the picture of the attitude of West Bengal government against its own citizens/people/society and students. The strangest thing is that all these student of the UNIVERSITY  are the future of India and West Bengal and they have been treated like this way. Its, matter of high concern that these engineering students who are the future of West Bengal and Indian economy over the next couple of decades are being treated merciless for a protest.

Recently one of the MP of Trinumul Congress the ruling Party of West Bengal said openly in public place that he will be promoting rape in West Bengal. Where are we living is the question of trillion dollars?JUST IMAGINE SINGAPORE COMES TO OPEN FACTORY AND HUMAN LABOR GETS TRANSFERRED HERE IN WEST BENGAL INDIA AND THEIR CHILDREN GET ADMITTED TO JU AND THEY ARE BEING TREATED LIKE THIS.THIS SHOWS THAT WEST BENGAL GOVERNMENT WANTS TO KILL VOICE AGAINST ANY PROTEST. 

It clearly shows about the current state of Affairs of West Bengal. Around 5 students are in hospital due to attack on them by these combat force special category police who kicked and used their techniques to kick out and throw out the non-violent students out of the campus. Girl’s dresses were torn and turned into half naked. Lights were put off so that no visibility is available. I am ashamed to tell about the type of molestation have been conducted by the police with the girls.




PLEASE SEE THE VIDEOS TO WITNESS THE PROTEST MODE AND THE POLICE ACTIONS.  I WILL BE UPDATING MORE SNAPS OF THE SAME.



Wednesday, August 27, 2014

Corruption Based Consumption or CHINA GDP Decline by 1%-Flight of Capital

Corruption has been a bacteria spread in every economy and in every culture.  Billions of speeches have  been delivered to alleviate corruption but how much have been in the real sense is a question of trillion dollars. China has joined and has blown bugle to fight and reduce corruption within its economy. But this bugle will cost the economic growth for the country. Before I start writing I am confused about how to reflect my emotions on this matter. Should I name the article corruption based consumption or birth of a new economy or decline of GDP. Rival economies of CHINA would be happy since pulling down 2nd largest economy to below is a big achievement.

In my research I find that Chinese economy is going to get a healthy slow down in the coming years, ’MAY BE BY DECEMBER 2014 or MARCH 2015’. According to my Estimation around 0.6% to 1% GDP slowdown is being expected from China in the coming year’s time frame. With the recent introduction of GRAFT in china, Chinese investments are flowing out of the country and they are looking aggressively for shifting their asset base from China to other economies. This can have a ripple effect on the economy in the long run. A part of the effect is very much visible now on the real estate sector. Well the rationale behind the slowdown of the Chinese GDP  is that the anti corruption factor has  stalled  the government's economic agenda and administrative reforms, The mounting toll of probes, prosecutions and punishments for offenses ranging from bribery to moral misbehavior has sent officials running for cover, slowing implementation of new economic policies.

Currently in 2014 china has been busy in creating history which will be sung by its grand children to their grand children’s. In 2014 China plunged deep into shopping in the real estate sector where the sector is overshadowed by issues such as tight financing and high inventories which are weighing on prices. London was the most popular destination for Chinese institutional investors, with a total of $2.3 billion (1.35 billion pounds) splitting mostly into residential and commercial spaces. San Francisco and Chicago followed with $548 million and $365 million. China's institutional investment in property overseas rose 17 percent in the first six months of this year, with residential investment surging 84 percent according to real estate services firm Jones Lang LaSalle (JLL). The Central Military Committee, which controls China's armed forces, says it wants military personnel to annually declare the property they own, and has threatened to punish officers who hide or falsify their declarations. China's corruption crackdown has already taken a bite out of the hospitality sector in China with its ban on lavish banquets. Hence bells of slowdown are ringing. Chinese are selling their properties to get out of China and this is well clear from the level of discounts being offered which ranges from 5% to 10% cheaper than the average prices of comparable homes. So flight of capital and consumption has begun. The high level of declarations and negligible conditions of bribery cuts the throat of consumption driven by corruption.

Drilling further in my research I find that Chinese investors are mainly insurance and developers who are building up their investments in those countries where tourist destination is active for the Chinese. Australia and Canada ranked second and third respectively even though it cancelled the Immigrant Investor Program in February. In my research I have found that there is going to be a continuous growth in the coming years in outbound real estate investments by china. The prime trigger for the same is the wild axe which is begin hung over the people due to the fear being caused in China by President Xi Jinping's 18-month-old drive against the pervasive graft that he says threatens the Communist Party's survival. As the corruption crackdown gathers momentum in China, more wealthy Chinese are moving out of the country. The level of fear is even threatening life which propels the growth of the outbound investments. Flight of investments and capital is going to put brakes on the economy. This might be taken as opportunity for the rival economies to push back china and get back the lost economic growth opportunities. Now the biggest question is this that how much corruption would be eliminated or will there be war in china internally.

Saturday, August 9, 2014

Indian Broking Companies gear up…Change your sales Training & Approach


In 2003-04 when I started my career in the financial world I was an extreme unknown citizen of this world.  I joined one of the leading broking houses of Kolkata name Karvy Stock broking where I was asked to join as business distribution fellow. I joined Saltlake branch which was one of the best branches of the broking firm and the branch head was Mr. Joydeep Mookherjee. My first few month of training in that company was never provided and I was asked to report to one of the senior named Mr. Subendhu Mukherjee. I was asked to sale mutual fund and I remember that my first sales were of Rs.80000/. I sold this product since I prepared a research note on infrastructure growth, jotting down points from the economic times. I mugged them and went to give the presentation to the client and got the business. Hundreds of training was arranged by the company was full of wastage since none of them taught that by which way we can sale the product in the market in the right way. I know many will say that nobody provides any training about how you will sell the mutual fund scheme or trading account to a client. We provide training about product and its specification and business process, polices, work ethics, moral values etc.  But do we provide training how this product will be sold and what the client is looking for and how one will match and identify the requirement of the client. I will be discussing about this part in a broader manner later on in this article.

It used to be heard often from the seniors at that point of time that once has to learn while in the process of sales. But what process we are discussing here? Do you mean process as the Branch head guiding you to sell or your senior acting as mentor? In my career I have seen the game of recruitment of 100 people in the sales across branches and after 6 months turning out 80% of them, based on ground that they are incapable to achieve the sales targets. Well in this competitive world no body teaches any one. Only few handfuls of people who are willing to build a team from young folks and growing the same are being found in this financial world. In my career and surrounding I have found both of them. In my career I found a fellow named Mr. Manojit Chatterjee who took the courage to build team while working Religare and now he is the Branch Head of a renowned broking firm in Kolkata with the same team. The same type of another fellow I found Miss.Mahuya De who formed a team and created the 1st distribution team of Bajaj Allianz Financial Distribution in 2007 March in Kolkata. Now these stories are histories but we need to learn from the history how successful business grows.  We are not in the phase of 2003 where penetration level of equity investment was low. Online platforms and technological up gradation has changed the culture of investments. Hence your young recruitments need to be trained in a different manner so that clients and company gets into a win–win proposition.  The above successful teams are being build based upon the below mentioned strategy and not based upon humiliating words of the sales head/Branch head.

The reason behind writing all these histories and success stories is that we are again in the journey of an historic bull market in the Indian stock market. Broking firms and financial distribution companies like Trading Account, Mutual fund and Fixed Deposits are back on the street. Huge salaries, bag full of incentives and innovative franchise models would be flocking on the streets. But the biggest difficulty in acquisition of clients and meeting the targets of the company and branches would be from the quality of knowledge being provided to the young vibrant college pass out new sales people. One need to understand that today there are several companies who are having broking and financial business.  They are all in the race of acquisition of clients, hence knowledge and the power of the same is the key trigger for acquisition of client. We need to drop out the traditional process of selling products like Trading account, Mutual Fund etc. We need different approach where companies or branch managers should create their branches as school where these young fellows should be provided knowledge about how to read balance sheet, interpretation of ratios, and stock price movement analysis with fundamentals over the last 5 years. This type of training and knowledge building approach should be adopted in every company. The advantages would be that when these young fellows will vomit the same story in front of their clients acquisition of clients would become more easy since today’s clients prefer to work with experts an don’t with fresher’s. This also reduces the rejection/refusal percentage from the clients when your company or branch representative visits that client. Just imagine when one particular client is being visited by 4 broking or financial companies and they all repeat the same story of sales approach.  You being the 5th one following this strategy become the lucky fellow to get the clients portfolio in your kitty.

We need to get these fellows groomed with process but not depending on the process of Branch mangers kindness and senior’s pressure based sales process. We need well defined fixed process format where team building should be based on knowledge. Now a question might come up that if I provide and groom these fellows with so much internal investments then why should I pay hefty packages? Well in today’s competition if you don’t be the first, be ready to be the last. Today’s clients are more informed hence your sales representatives should be well educated in terms of the product history and its ins and outs. Gone are the days when individual product focus based sales approach used to be the key. Today we need to adopt the strategy of getting the entire clients portfolio is one place. For doing this it takes immense trust which we need to build through our knowledge backed approach.

High level of attrition rates threats to the company’s good will which every branch and company should learn. Team building cannot be a forced sales pressure and humiliating words of the branch head or its senior reporting bosses. Today’s sales competition is with better informed knowledgeable manpower and creating a challenging atmosphere for the clients not to refuse your business proposals. In insurance companies I find that young fellows are being briefed about products of the companies but did any company provide training about its historical products and its performance covering the life cycle of the product. The days of general training are over. We need to convert every sales fellow as researcher, a product manager etc. When a branch and its company has some distinct plans for its young employees in the long term then only the company would be able to create a mark in the market. The old process of sales where targets and its achievement measure policies cannot be adopted.


These process only lead to mis-selling since we all know that miss selling happens only when humiliating words of the seniors becomes a nightmare. That is why I said that every branch and company should try to become a school and create genius in the coming decade in the upcoming biggest financial bull market of India. When we create brigade of these types of young professionals we create a revolution in the market which further filters the financial market players. Moreover new teams are being created where is mis-selling is not the survival option.   Branch heads must learn that in this upcoming bull market high levels of attrition cannot be accepted and hence we need to plan ahead rather than hiring blindly and later on turning these fellows out. This might save the Branch Heads and managers from the axe of the senior management but in the long term this entire things goes detrimental to the company’s growth in the long run. Hence invest on knowledge for your newly young sales team.

Friday, August 8, 2014

BRIBERY TO BANKS...VICIOUS NPA.....COST ACCOUNTANTS ARE REQUIRED

The recent case of Bhushan steel should be an eye opener and an alert sign for the Indian economy and for the government of India. If we analyses the last 10 years of the Indian economy from 2004-2014 we will find that first 5 years terms of the UPA government was growth progressive economy where as the 2nd term win of the UPA II gave the confidence for all malpractices to grow.  Deliberate defaults have been the trends over the last 3 years. On the other hand a Bad asset sale has begun but all these numbers are very low compared to total outstanding loan amount of the Indian Banking Industry. Well I dont know the reaction after reading the whole article but few of friends would plan to kill me since these type of cases are going to become more prominent in the coming days. 

When a loan is being provided the report of the Chartered Accountant is required who gives proper valuation report about the company to the Bank. Based on this valuation report the bank enters into the contract of providing finance. Now this bribery case reveals one thing very clearly that there is network of this type of process where the Bank, Chartered Accountants & Big Cats of the corporate are involved. I am confident that in the coming days this matter will get negligible attention from the public and from media but the long term trust of overseas investors is at high risk. The reason behind that when such an huge number of NPA followed with corporate will full are not paying in such scenarios its quite clear that asset  value was inflated and the valuation report provided by the Chartered Account was gimmick report.  Now let’s get into the jungle of numbers where overseas investors risk and global investors appetite would face hard landing where bribe and other malpractices are breeding. Well we Cost Accountants have demanding to provide the Bank Audit to us but it still remains unheard. This is because we are not masters in inflated books and providing improper valuations to the bank and fool the tax payer’s money.
The growth of numbers of PSU banks outstanding loans as on 31st March 2014 stands




Now the numbers are very clear to say and depict many thing regarding the risk for the overseas investors, trust of investments in the Indian corporate as well as the authenticity of the Chartered accounts Financial Audit and financial papers prepared by them.  These are all tax payers’ money which has been deployed for growth of the Indian economy but at the end they are all going to be entered in the Banks books as Non Performing Assets. Another big question is who will be buying these bad assets.

The recent bribery case raises many questions like will Indian banks would be able to recover the money or some bribery cases would happen to turn these amounts into Bad Assets.  If tomorrow the Indian Banks fails and the government also fails to recovery the funds then what will happen to the Fixed Deposits and savings which have been kept in the banks by all of us. Will there be a situation like U.S and Europe. This rising NPA and the game of the few Chartered Accountants are very simple. The Chartered Accountants of the company and of the Bank are all members of the same Institute. Now when a corporate wants to raise loan they inflate the books and valuation of the assets. After the loan is being disbursed then the Chartered Accountants of the company and of the banks and managers of the bank in the key position get certain percentage as commission which ranges between 0.25 to 1% depending upon the case. This vicious cycle keeps on moving until cases like Bhushan steel comes up in the lime light.  Now in every case of Nonperforming assets no chartered account comes into limelight. The bribery case is one of the same strategy game .

Another question in the mind is that these loans were not created overnight. They have built over a long period of time, now Bank Audits are being conducted by the Chartered Accountants, hence why they did not raise the alarm regarding the quality of assets being financed and about the valuation of the assets being financed.

Now if we look at the quality of sectors where the NPA have grown we find:that the vicious cycle is present in every sector.


Now a another point might come up which will say that these sectors and high levels of NPA are due to slow down of the Indian economy in the last 3 years and negligible condition of export due to the slowdown of the US and Europe. Well I agree and buy this point but will you also buy these points:
1.   Pramod Mittal spent 60 million Euros on daughter's lavish wedding. Pramod Mittal, the younger brother of steel tycoon Lakshmi Mittal, owes a lot of money to Indian banks. Before his company, Ispat Profiles was taken over by JSW Steel, till end of FY10, the company owed Rs.7200 crore to 15 banks, it over dues were over Rs.400 crore and needless to say, it was sitting on a huge loss. But in 2010, the IT department raided the company and its promoters and lenders were staring at a Rs.10,000 crore bad loan only on account of this company by end of March 2011.  Now what the auditors of the Banks were doing when the banks provided loans to the overstretched valuation of the company. It simply proves that the assets and financial valuation were inflated by the few Chartered Accountants.   Well this is also proved that the company was not paying salaries, not clearing electricity bills and factories were shut down, plant and machinery was rusting away. While workers suffered to get a decent meal on their table, there was no change in the lifestyle of Mittals – cars, big homes in foreign land, helicopters and helipads and of course, huge loans. For over 10 years, banks knowing fully well that Pramod Mittal’s company was defaulting, gave him one loan after the other – in fact in 2010, when defaulting by Ispat was at its peak, SBI sanctioned fresh loan to the tune of Rs.130 crore, of which it adjusted Rs.30 crore as payment towards previous loan.  This proves my earlier statement about the vicious cycle of the Chartered accountants and banks.
2.       Now please remember the case of Kingfisher Airlines. I hope I don’t needs provide any clarification for this case.

This is how the game of few Chartered Accountants and Banks and Big Cats play the game with tax payer’s money. Now these Chartered Accountants are doing the financial audit and this is their True and Fair position of the Indian Banks and Corporate. We cost Accountants have been demanding to provide the Bank Audit so that we can help the government to identify the malpractices and also the quality of assets being financed. But unfortunately it was never heard and I pray that let Indian banks fails like US and Europe and then only the Government eyes will open and will be able to hear our voice. These non performing assets money goes nowhere but all at the back of luxury living style. Just watch to your professional neighbors growth rest you can understand.


This raises alarm for the corporate India regarding the quality of its books asset valuation and high risk for the overseas investors in India.

Sunday, August 3, 2014

Cost Planning & Cost Management tools at Toyota Australia series-4


In my last series I have discussed about the application and adoption of Costing methods for the improvement of the economy and Mercedes Benz http://taxguru.in/chartered-accountant/cost-management-costing-methodskenya-2030-series-3.html. I have tried my best to portraying the picture the importance of the profession in the global context since India is keen on abolishing the same where as the history as well as the future of the global corporate/industries/economy is adopting more the costing methods. Today I will be sharing an historic research being conducted and adopted Cost Management and adopted costing methods by a Fortune 500 company named Toyota. The company made a historic turn around in the year of 1997-2000 by adopting costing methods. It not only adopted but made it a cultural change within the employees of the company to abide the same. The company did not have the liberty of making unique designs and model for country specific. They had one universal rule that they will launch and built unique models for every country irrespective of country specific models.
Before I get into the cost management details I would like to give short introduction to the company operating in Australia. Toyota Motor Corporation Australia Ltd (TMCA) is a fully-owned subsidiary of Toyota Japan. The Australian operations commenced in 1959 with the import of the LandCruiser, and in 1963 a passenger car assembly plant, which initially produced the Tiara, was opened at Port Melbourne, in Victoria, Australia. In 1987, the Camry superseded the Corona. Both the Corolla and Camry are now produced at the state-of-the-art plant at Altona (about 10 kilometers from Port Melbourne), which was commissioned on March 31, 1995. In addition to its domestic sales, TMCA supplied a number of markets overseas including Japan, New Zealand, Thailand, Malaysia, South Africa, Turkey and Oceania. In 1996 new markets opened in the Middle East (Saudi Arabia, United Arab Emirates, Oman, Kuwait, Bahrain and Qatar). TMCA began producing left-hand drive Camry cars for these new markets (cars in Australia are right-hand drive).

Toyota Australia competes with a number of importers from Korea (Hyundai, Kia and Daewoo),USA (Chrysler and Jeep) and Japan (Nissan, Mazda and Honda) in the year of 1997. The company was facing many problems which are as follows:
·         Oversupply Capacity
·        Attractiveness of the Australian market has been enhanced by the reduction of import tariffs which in 1997 were 22.5%, and were planned to reduce by 2.5% per annum to 2000. These reductions in motor vehicle tariffs have assisted importers, resulting in a very competitive situation.
·         Overseas competitors pursuing a very aggressive pricing policy

All these above problems created more challenges for the company .On the other side consumer demands were increasing in matching with the foot prints of increasing overseas market penetration like requiring options like air conditioning and power steering as standard equipment, as well as improved fuel efficiency and safety features), has meant that achieving high levels of cost efficiency is an important priority for the company. In 1998 the company took the step of to position themselves as one of Toyota’s global manufacturing and supply bases which required significant performance improvements. Tariff reductions had created additional pressures to achieve international standards in quality, cost and delivery performance. Also, the company needed to develop new export markets to justify the large investment by Toyota in a new plant. The company was planning to expand and become big. 

The company wanted to earn Australian dollars in terms of making its production cost competitive to the export markets in terms of automobile and parts and become No.1 in the production quality.  But the group company of Toyota was having the plan of that by  1998, it was expecting that 60% of all vehicle sales for the group would originate outside Japan. Thus, the main objective for Toyota is to manage profitability from a global viewpoint and maximize group results rather than those of individual companies. Achieving this objective, inter alia, involves globalized design work, sharing design and cost information among partners and developing close partnerships with overseas suppliers from an early stage of product development. Well this prime target of any company to achieve group strengths and this place where the company implemented/adopted costing tools and cost management actively.

There was little scope of increasing prices to improve margins as the market and the company was facing intense pressure. Toyota was having the biggest challenge of increasing its competitiveness beyond its competitors. Hence the company adopted the following policies in term of cost management
·         Product cost planning, which includes target costing
·         Regular cost reporting
·         Budgeting systems
·         Long-term business plans (LTBP)

While grilling into the cost planning the company adopted the value engineering and value analysis in the process of the production. This helped to design the products matching with the demand of the consumer. It helped to develop new and healthy relationship with the Supply Chain Management as Value Engineering helps to develop cost competitive designs.  Another role of the VE is that replacing the existing production design and implementing it into long term product designs hence the cost savings achieved during production of the current vehicles may be used in cost savings plans for the new models.

Target costing was engineered into Value engineering process so that models of cars could be matching with the preference of demand matrix. In simple terms choosing the demand rankings and designing the cost of production accordingly. Target costing was implemented and extended between the cross divisional departments like engineering, purchasing and manufacturing so that stream lined process could be created. The most interesting part over here is that Target costing was not applied on the product alone but also on the departments so that cost benefit and cost competitiveness could be achieved. Now a question might come up how Target costing was applied to the departments. The information of the trade-offs that may be required to assess the viability of changes in design, material and assembly activities which entails the sharing of knowledge across the business. Also, the major cost saving initiatives arise from the engineering, purchasing and manufacturing functions, as staff in these area are in the best position to identify opportunities for cost savings, and initiate activities and changes that may reduce cost. This is way through which cost management and costing methods to develop a well cultured, knowledgeable MANPOWER.

Coming to the story of the culture of Cost Management one of the employee of Toyota said that buyers cost management strategies helps to’ IMPROVE THE SUPPLIRERS PROFITABILITY’. Well Costing methods and its data analysis are not dangerous for the companies-they are helping other industries to improve jointly. Well India cost audit is not being given such high values but real truth is that the same data can be utilized in multiple industries to improve the company/business/industry. In the case of Toyota it was found that the employees has to formulate, plan and achieve individual cost targets buyers (Toyota),hence  employees needs to have expertise knowledge for costing methods and including design variance estimation and the full estimation of the cost of a part. History says that Toyota staff have written various costing modules that are used to help buyers assess the impact of various improvements in supplier operations. For example, buyers can assess the cost impact of a 50 percent reduction in floor space. In most cases buyers have open access to suppliers’ costs. This is the place where it becomes Win-Win position for the Automobile manufacturer and as well as the Auto Ancillary industry. This resulted significant improvement for the purchasing department and inventory management which is one of the core areas of Cost Audit and Cost Management.

Standard costing helped the company to identify the loopholes and block same. One of the classic examples being given by the Toyota company employees which I quote directly The company used to track paint as a total. We were saying cost per unit of the car for paint is roughly x dollars - but that wasn’t showing us anything. We would study the process for a month: what are we using, where are we using it, and where is the cost. We now set down usage targets and every month we track them, and inside the plant they’re tracking it every week. For example, a report is prepared by paint color - some paints are easier to apply and so on. What we were doing also is if we were having a problem with the paint application, we would rub the paint back to bare metal, then putting on another primer and another sealer. This led to a focus on re-paints. We asked quality control to go into the paint shop and start monitoring the process. Instead of worrying about the end usage, we concentrated on the process - if you control the process the usage is an outflow of it”.

The company started analysis the cost report to identify the cost control areas. Specific production areas may be targeted where there is the greatest potential for cost savings. For example, the paint shop has the highest energy consumption in terms of gas and electricity, so this provides a potential area for savings. This how the Toyota made its business competitive and improved its margin by reducing prices and gaining market share. Hence its proved dually that costing methods and cost reports has helped not only manufactures of automobile but also other ancillary industries in terms of the raw materials being supplied.

Remember that he level of competitiveness within the automotive industry is expected to increase in the future, due to tariff reductions and the ongoing cost improvements of competitors. But in India Cost Audit and Cost Methods are treated like inferior quality reports and tools. Rest is all know and I don’t need to repeat the same.  My concern is only in one area does Indian government really known the use of reports and their utilities. Indian macro and its industries are at huge risk which might not be visible now but will be visible when dumping of overseas production will happen and domestic will lose to import.


  © Blogger template 'Minimalist H' by Ourblogtemplates.com 2008

Back to TOP