http://www.gscgi.ch/fr/wealthgram_details/29

1. Gram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE
DES MEMBRES DU GSCGI
wealthgram@gscgi.ch
www.gscgi.ch
Vol. III
N°29 - Juin 2014
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
associations’ day
at 2014 cifa forum
•
XIIth
International CIFA Forum
THE NEW PARADIGM
FOR WEALTH MANAGERS
23rd
-25th
April 2014, Monaco, Hôtel Hermitage
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des conseils financiers

2. Recent changes in the country are visible and
perceptible
The monarchy paved the way for a parliamentary democracy
in 2008 to institutionalize the governance system. Given its
systematic planning, the economy itself has grown at rates of
7%, 12%, 9% and 5% in real terms, in the last four fiscal years.
Secondary and tertiary sectors led the growth in the recent years,
some large projects were initiated and public services expanded.
The resultant growth in income is apparent, and Thimphu has
expanded with the urbanization flow. New buildings, both
residential and commercial, are coming up along the Babesa
highway just before the city starts. This stretch of ~5 kilometres
on the southern side of Thimphu looks a major construction site.
The real estate activity is more in this part of town because this
is a stretch of flat-land,whereas uphill mountains at the
other end (north-west) of the city limit the scope of
real estate expansion. Two senior professionals
from the Bhutanese financial sector whom I
met informally said some home-owners are
trying out new interior designs inside the
houses, an indication of changing times.
While the building supply would be backed
by demand, not all would have the capacity
to buy new houses. It is easy to see cases of
families living in strained/worn-out houses if
one walks along the bylanes of the city, though
its proportion seemed lower than other Asian
developing countries. Nevertheless, how many of
them are actual home-owners, how many are tenants
on lease and how many can afford a home loan is something
only the Census statisticians can say. While education
enrolments have picked up, the job market has not kept speed.
Employment capacity of the public sector seems to be reaching
saturation and the private sector is yet to expand to that extent.
There were at least 2 taxi rides where I was surprised to find that
the drivers (a man and a lady of the younger Gen-X/older Gen-Y age
group) were actually qualified students working in a government
office on-contract for part of the week, and were driving taxis in
the remaining time to supplement their income. Both said they
were lucky they were able to afford car loans, as not everyone
is able to do so. But there did seem a sense of despair at the
general lack of full-time job opportunities. Regarding low-
income labour, either the Bhutanese have not built their skills
or they seem not to like getting their hands dirty - a bit akin
to the Arabs in the Middle East. Most of the labour working
on road and construction projects seemed to come from India,
a fact made clear on hearing the music playing on their radios
GramGram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
Vol. III - N° 29 - Juin 2014
PLACEMENTS & TECHNIQUES DE GESTION
Cracking Asia’s final frontiers by utilizing “islands of proficiency”: Case of Bhutan
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
1
•
Frontier markets have caught remarkable attention in recent
months. As an analyst is said to have summarized it during
an investor roadshow in Nairobi - that everyone and their dog
seems to know something about frontier markets. Improving
governance, positive demographics and reforms’ initiation at
one side, the large population is a major rationale to look at
economies like Vietnam, Argentina, Kenya, Colombia, Nigeria,
Bangladesh, Romania, Pakistan or even Myanmar. From
population terms, there would hardly seem a validation to
think of countries like Bhutan. After all, it has a population of
just ~750,000 and does not figure in the list of typical frontier
markets (hence. I have used the term ‘final frontiers’).
However, every economy is still an economy. Specific
opportunities can exist for those enterprising enough to
invest some time to sift through its threads, identify
sector-specific micro stories (‘islands of proficiency’)
and place emphasis on the profitability potential
of opportunities rather than just the growth
potential. One needs to look at it more with
a granular/micro/sector-specific mindset
rather than a broader/macro/‘country-story’
mindset with which most look at the large
emerging/frontier markets. In January 2014,
I made a short trip to Bhutan, and took
that chance to make some observations on
‘Ground-Zero’. There are three basic reasons
why I think there might be some rationale to
look at this final frontier market. First, Bhutan is
a country which has undergone political and economic
transition. More importantly, it is phasing it in a gradual, step-
by-step manner. That might seem an intelligent and mature
way of managing transitions, given the numerous cases where
countries have simply rushed head-first and often fallen nose-
first in the process. Second, the attitudes and aspirations are
changing with uptick in local income and media proliferation,
fuelling demand in specific sectors. The strength of the
‘demographic attitude’ in this case offers the chance to help
businesses benefit from ‘islands of proficiency’, especially as the
competitive scenario is still nascent and there is scope to capture
the first-mover advantage. Third, the debate between chasing
profitability (or ROE) or chasing growth has bitten the post-
2008 business world, especially when it comes to a new market.
Thecriticalityofmaintainingprofitabilitytoavoidcapitalerosion
and accumulated losses cannot be overemphasized. After all,
not every venture by global businesses in the large emerging/
frontier markets has shown rapid profitability.

3. GramGram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
Vol. III - N° 29 - Juin 2014
PLACEMENTS & TECHNIQUES DE GESTION
Cracking Asia’s final frontiers by utilizing “islands of proficiency”: Case of Bhutan
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
2
•
when one halts beside their work sites. Most of the boys of
the older Gen-Z/younger Gen-Y are increasingly sporting the
‘punk’ look and most girls are sporting generous doses of chic-
fashion/accessories. An expat working with an international
organization in Thimphu told me that the young Bhutanese
have become big fans of Korean television programmes. People
are high on aspirations and desires, reflected in changes in
attitude. Those who are earning well are willing to spend on new
consumption, be it clothing accessories, cars, hang-out zones
or department stores. Cars are larger and in more quantum
and variety, whereas they used to be smaller and fewer till the
1990s. New coffee shops and restaurants are sprouting up in
the city centre, and affluent local/expat crowds are thronging
at all hours. Average prices in these establishments seem on
the higher side as compared to levels in
Thailand, India, etc. But then Bhutan
has very few such outlets, hence, some
element of monopolistic-type pricing
by the first-entrants might be existing.
While department stores used to store
mostly ‘Made in India’ products earlier,
now one can see ‘Made in Thailand’ and
‘Made in... etc.’ also jostling for shelf
space in most stores.
What sector-specific micro
opportunities do these changes
spell?
Following are a dozen that came to my mind based on the
observations. I emphasize these are not just products for
global businesses to export to Bhutan. Most are possible to
be also produced locally in Bhutan over-time. That can create
production-oriented jobs for locals, instead of just trade/sales-
related jobs. But that depends if the country itself has the
capabilities or desire to expand into ventures, albeit with foreign
investment/foreign technical partnership. Some of these ideas
use intellectual capital, some use physical capital, and some use
a combination of the two. In most of them, I have tried to draw
parallel to India using similar Indian companies as examples.
Similarly, such examples of successful companies would exist
globally in other countries as well:
1) Electric cars: Bhutan has been looking at electric cars sector
for some time, and has recently cut a deal with Nissan for
its Leaf. Despite being a hydro-electricity producer, most
of its internal energy consumption is fuelled by imported
fuels as most of the hydro power is exported. Apart from
environmental concerns, there are other justifications
for electric cars. Thimphu is only as big as an average
neighbourhood/borough of a city like Mumbai, Delhi or
Bangalore. Hence, intra-city driving within a small city
means one is never really too far from their homes, i.e.
the charging point. The Bhutanese financial professionals
remarked informally that young Bhutanese increasingly
preferred to drive, rather than walk short distances. While it
does not mean the population is becoming lazy, it does show
a shift in people’s attitude. The vertical expansion in the city
is yet to occur. Most buildings have few storeys which makes
wire-charging practical if batteries are difficult to detach
and carry. Mahindra & Mahindra also announced plans to
launch its E-20 (formerly Reva). Entry strategies by electric
car makers should be more aggressive if
the price differential between the various
models justifies it. Mahindra E-20 costs
the equivalent of ~0.6 million Indian
Rupees in India. Through informal
chats with local cabbies, I learnt that the
average car imported from India costs
about 20-25% more than its price in
India. By that estimate, one can add 20-
25% over the mark-up of the Mahindra
E-20 for its cost on Thimphu’s roads.
Public transport of choice in Thimphu
is also the taxi. Most taxis are Maruti
Suzuki WagonR/Alto or Hyundai Santro made in Indian
factories, which cost ~0.35-0.5 million Rupees in India. The
price point of electric cars keen to enter Bhutan has to be
comparably affordable; otherwise the loans might be out of
reach for most buyers unless the loans are subsidized.
2) Processed-packed food products: There seems a demand for
processed foods like meat products etc, as evidenced by the
stocks in department stores. The population is able to pay
and willing to pay. Hygiene in packaged foods might be a
reason, as compared to the raw meat at the traditional shops.
Another is the longetivity of the processed/packed version.
Daily cooking is not practical with a working population
comprising both men and women due to lack of time and
lack of hands, a feature also common in India. Bhutan itself
has set-up a company in the agro processing space,and there
might be a rationale to invest into similar processing facilities
given it has adequate supply of the raw materials.
3) Mobile V.A.S.: In a country where TV programming was
banned till the 1990s, media proliferation has now grown
===============================
“the average car imported
from India costs
about 20-25% more
than its price in India”
===============================

4. GramGram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
Vol. III - N° 29 - Juin 2014
PLACEMENTS & TECHNIQUES DE GESTION
Cracking Asia’s final frontiers by utilizing “islands of proficiency”: Case of Bhutan
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
3
•
leaps and bounds. Latest phones are visible everywhere,
and young faces are visibly busy peering into their various
gimmicks. This suggests potential for Mobile VAS providers
to tie up with local networks. Mobile VAS includes mobile
gaming, tones, infotainment, live streaming, m-commerce,
etc. A number of mobileVAS players in India like OnMobile,
InMobi, CanvasM, Mahindra Comviva etc have made this
segment a success story in the Indian telecom space.
4) Solar renewable energy: The sunlight is intense and virgin
when it hits people in Bhutan, which is easy to understand
given its altitude and low pollution. It was enough to
tan a person within 3-4 days if most of the time is spent
outdoors. Conversely, the sunlight hitting flat and polluted
cities is more diffused and mild. So is there a scope for
solar renewable energy? Its government
does seem to have upheld environmental
causes. Solar power would further reduce
its dependence on oil imports. Being a
mountainous terrain, the country has
tracts of land which are not easy for real
estate or agriculture development. This is
visible in the eastern parts of the city across
the river, on the western part near the TV
Tower, and on the southern part around
the Buddha view-point. These tracts can
be useful areas to set up solar photo-voltaic
panels to absorb sunlight and channelize the electricity into
the national grid. Today, solar panels are easily set on roofs
of buildings and large-scale solar panel farms are also being
set up. Logic suggests that sunlight absorption would be
higher where it is more intense and bright. Nevertheless,
a limitation is that the movement of shadows owing to the
position of nearby mountains vis-à-vis the sun can restrict
the amount of time sunlight hits a specific surface.
5) Commercial loans, boutique i-banks and online trading
developers: Bhutan’s government pays for healthcare and
higher education for its people in most cases - two key
reasons why people globally save. Bhutanese seem more
consumers by nature, rather than savers. Low interest rates
historically have also not been much of a motivation. This
can constrain the ability of the Bhutanese banks to lend to
investible projects, if the supply of funds does not match the
demand. Depending on the due diligence of local projects
and regulatory requirements, there might be an opportunity
for global commercial banks to look at lending to genuine,
high-asset quality projects in Bhutan. To draw a parallel
to India, commercial banks here have funds owing to the
average Indian’s propensity to save. But the ability to lend is
constrained due to asset quality concerns in the wake of the
economic slowdown. The scope of capital markets also draws
interesting observations. The local professionals told me the
country’s stock market has only about 20 listed companies,
but the appetite for those initial public offerings had been
huge. One can argue the appetite is high due to the fledgling
stage of the markets and novelty of the IPO product. But
one can look at it from another angle – that cracking the
first sale is often the toughest sale and subsequent sales
get accepted more easily, more so if the money in people’s
wallets is only set to grow. Potential appetite of future
listings might warrant the attention of boutique investment
banks for sector-specific advisory service.
Online trading in shares has also picked up,
and might offer scope for technology service
providers to partner with the four local
brokerages to enhance their online offering
to clients.
6) E-commerce retail platforms:
Indian e-commerce firms like Flipkart,
MakeMyTrip, Rediff, Jabong, Myntra etc
have garnered market share in India, and are
employing large numbers of people. Bhutan
has good internet connectivity and most
young people are literate and computer-savvy. If investing in
physical outlets poses viability concerns, then expanding the
e-commerce offering might have potential,provided security
of online payment gateways is maintained. There is hunger
for products - evidenced by the variety of casual apparel,
shoes, fashion accessories, electronic and entertainment
gizmos, etc seen on the people in the high streets. Formal
clothes might have a limited market, since most locals wear
traditional attires at work. I do not know the penetration/
safety of online banking services in Bhutan, but there are
also strategies to navigate that if it poses a constraint. For
example:India’s Flipkart allowed cash-on-delivery option for
clients in India who were unable to make payments online.
7) Pre-fabricated furniture: Given the real estate activity, there
might be a rationale for pre-fabricated furniture. These are
made from compressed ply,sawmill products,etc,and are easy
to set-up/dismantle, easy to move and light-weight. They
are increasingly favoured in India for its practical advantages,
if the foot-falls seen in stores like Home Town or Reliance
Living are an indicator. Bhutan,though being rich in timber

5. GramGram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
Vol. III - N° 29 - Juin 2014
PLACEMENTS & TECHNIQUES DE GESTION
Cracking Asia’s final frontiers by utilizing “islands of proficiency”: Case of Bhutan
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
4
•
resources, restricted the export of timber to India few years
back to maintain its ecological balance and prevent excessive
deforestation. In this context, the demand for furniture
fuelled by the building boom might mean demand for more
timber, something which the nation might want to avoid in
order to maintain its ecology. Hence,usage of pre-fabricated
furniture might actually serve a broader national interest.
8) Chic hang-out zones: Growing consumption and changing
lifestyles mean changes in the way people spend their leisure
time, be it in shopping plazas or socializing in ‘chic’ public
spaces like coffee shops and restaurants. These are the
current hang-out zones for the affluent locals, and the 1990s
western music playing in some of them seems to target the
younger Gen-X/older Gen-Y age group. There might be
more appetite for such outlets if the
quantum of high-income earners
grows further, coupled with the fact
that the number of such chic outlets
is still limited in the city.
9) Vocational/professional courses in
higher education: Constructions of
the Knowledge Park on the Paro-
Thimphu highway and the IT Park
in Thimphu are evidences that the
government is taking the objective of
higher education and creating further
jobs very seriously. But apart from
universities/colleges,higher education
also includes professional and
vocational courses focused on specific streams which help
build expertise in that specific area and make the students
job-ready. It helps create ‘employability’ of the students.
Successful examples in India are software/IT institutes,
hotel management colleges, graphics designing, media and
mass communication colleges, industrial training institutes
etc. After all, there is only a limit of engineers, doctors and
lawyers a country can employ. Every country also needs
professionals in other work areas as well, otherwise it needs
to import that talent. Investing into education is also akin
to investing into the country’s future, since the skills of its
people are its biggest asset against competing nations in
the global arena. India’s leadership in the global ITES and
software sectors are classic examples.
10) Online newspapers: Local newspapers were not really
impressive, with dimensions of an afternoon tabloid paper
and just a dozen pages. The small population size poses a
constraint to set-up the full fledged newspaper since the
readership base is limited. So it might be worth looking at a
digital/online newspaper with both news and infotainment
content, which makes its revenue from either the advertising
or subscription. There might be such products already
existing in the country, unfortunately I did not spend much
time in ‘Bhutanese cyberspace’.
11) Online travel booking platforms, budget hotel chains: Tourism
is a major draw. But what is really missing is a good online
booking platform if one is not travelling as part of large,
package groups. Using my own experience,it was difficult to
book Druk Air’s tickets online, and it has a limited number
of travel agents. It was also tough to book hotels through
phone/email. Of the dozen hotels in
the Ngultrum 1,200-2,000 range whom
I contacted, only two acknowledged. It
was not the most streamlined booking
experience. Hence, there might be scope
for online booking platforms which
make it convenient for individual budget
travelers, like MakeMyTrip or Yatra in
India. However, the number of tourist
arrivals may not grow exponentially -
the small tarmac bay of Paro airport can
only fit a limited number of aircrafts,
road travel is time-consuming, Gelephu
airport development is delayed, and the
government itself is keen to limit the
tourist inflows to maintain the ecological balance. Hence,
service providers need to manage costs within limited tourist
volumes. Budget hotel chains might take a look at Bhutan.
Why not 5-star chains? Most foreign visitors apparently
pay a per-day fee which limits the number of days spent,
most of the time in Bhutan is spent outdoors in day-trips,
there is limited time to spend in the hotel to use its luxury
services and the existing 5-star TAJ property might just be
sufficient for the quantum of high-end tourists. Resultantly,
the numbers might warrant the attention of only budget
chains like Ibis, Ginger Hotels or Lemon Tree.
12) Fitness centers: From the above observations, it is apparent
that the Bhutanese society might be on the eventual path
where people are walking less, not always eating healthy
foods,too busy at work to take time off,etc. Such examples of
societal transformations abound globally,where a proportion
of the people fall prey to lifestyle issues like obesity,‘bulging-
===============================
“Bhutan, though being rich
in timber resources,
restricted the export of timber
to India few years back
to maintain its ecological balance
and prevent
excessive deforestation.”
===============================

6. GramGram
Wealth
THE IFA’s
LA TRIBUNE MENSUELLE DES MEMBRES DU GSCGI
wealthgram@gscgi.ch • www.gscgi.ch
Vol. III - N° 29 - Juin 2014
PLACEMENTS & TECHNIQUES DE GESTION
Cracking Asia’s final frontiers by utilizing “islands of proficiency”: Case of Bhutan
Groupement Suisse des Conseils en Gestion Indépendants www.gscgi.ch
5
•
waist’, etc. This might just interest fitness chains like Fitness
First, etc.
Is it justified to look at these opportunities, given it is
a small market?
Here I would like to draw the attention on the profitability vs.
growth debate highlighted in the initial paragraph. The market
might be small, but one needs to look at it from the perspective
of a correspondingly lower capital outlay and the profit potential.
For example, I might need 100 dollars of capital to set up 10
outlets in a large market where I might earn 20 dollars profit.
A small market like Bhutan might warrant only 1-2 outlets, i.e.
a limited outlay of 10-20 dollars. But as long as the project
earns a profit of 2-4 dollars, the ROE is maintained. It has
some ‘margin of safety’ since the absolute amount of capital is
committed to an unknown market is lower. Even expansion
into small areas within a large country requires breaking up of
the larger business plan to examine the viability per location.
Hence, one can compare a small market like Bhutan to a sub-
portion of a larger economy. But it assumes the 2-4 dollars
profit factors in the additional compliance/regulatory cost,given
it is a separate country. The potential to earn that profit fast
seems to exist because: (a) Competition is still limited and the
first-mover advantage exists, to some extent. In comparison,
competition is already high in large emerging/frontier markets.
Bhutan might not be a demographic story, but it seems to hold
potential to realize profitability faster vis a vis larger markets,
which hold higher growth potential but are challenged due
to sheer number of players competing, leading to capital
erosion, delayed break-even and unrealistic price wars. (b) The
government will also have to think about increasing economic
opportunities for its jobless youth, otherwise restlessness and
impatience will eventually rise as the supply of qualified youth
increases each year. The monarchy seems pro-people, and its
popularity amongst the local/foreign residents is clearly visible.
The commitment of the establishment to create opportunities
for its people seems to be concrete. The government has to
delve how it can manage the economic needs of its youth within
its much admired Gross National Happiness objective.
Does this mean there are no challenges?
The government has faced criticism in the international media
foritshandlingofthesituationoftheBhutanesepeopleofNepali
origin who could not prove their residency as per the 1958 law,
rendering them homeless in camps in Bhutan and Nepal. There
have been some incidents of violence and situations of unrest
associated with this issue. Any situation causing heterogeneity/
ghettoism of population segments is best avoided, especially in
a small country like Bhutan where any demand leakage should
be a concern. Also,when people and lifestyles mix,it is good for
business as it enhances scope for products that one might not
otherwise have demanded. Another is the vacancy rates in the
newly constructed buildings. If the demand continuously falls
short of supply and prices do not reconcile, then vacancy rates
will move northwards and remain sticky. This can eventually lead
to a bubble and loss in invested capital. The supply of educated
youngsters is only going to increase each year. Controlling the
impatience and frustration of its educated yet jobless youth is a
socio-economic challenge, especially to avoid those ill feelings
getting targeted towards the government. Lastly, while some
steps of the government might seem restrictive (like restricting
car imports, etc.), they were good from ensuring the nation’s long
term sustainability. But such uncertainties worry those who
have committed capital.
Conclusion
There might be some opportunity to extract profitability even
in the ‘final frontier’ markets, despite the population size not
being significantly large. One needs to look into the viable
sector-specific micro ‘islands of proficiency’, study the strength
of the ‘demographic attitude’ rather than just the ‘demographic
quantum’, the existent competitors and scope of the first-mover
advantage. At the end, profitable growth makes a valuable and
sustainable business. In this case, the absolute value of potential
profitability is low owing to the lower capital outlay in a small
market. But the chances of achieving the potential profitability
faster seem bright, especially when one recalls that a proportion
of new businesses in large emerging/frontier markets are still
struggling to achieve profitability due to the old adage – too
many cooks spoiling the broth.
Sourajit AIYER
sourajitaiyer@gmail.com
____________
This article was originally published (in
abridged form) in The Straits Times, Sin-
gapore
The author works with a leading capital
markets company in India. Views ex-
pressed are entirely personal and do not
represent those of any entity.