FERRARI AND THE BUILDING OF VALUE

Last week iconic car brand, Ferrari listed its shares on the stock exchange.  At the end of its first day of trading the car’s share closed at $55 (sh200,000) valuing the company at $10b ( sh36 trillion) or about half the size of the Uganda economy.

Compared to other car companies like America’s GM, which is valued at $50b, Ferrari only made 7,000 cars last year compared to the ten million cars GM rolled out last year.

This an astounding metric because if we say each GM car accounts for $5,000 of the giant car makers market value and using a like for like comparison Ferrari, the company, should be worth about $35m.

Using simple arithmetic this would suggest that Ferrari the company is selling at more than $9b premium to its industry worth.

"The almost 100 year company – it was founded in 1929, has made a name for itself by producing machines while elegant are the byword for power and performance, a strong heritage that is unmatched by any other car maker. The combination of these has also meant that Ferrari’s sell at huge premiums a situation that has been managed very well by its owners up to this point....

It’s safe to say with a price tag of between $190,000 and $400,000 (sh720m and sh1.4b) there are probably no legitimately rich Ugandans who can own a brand new Ferrrari.

However the lesson for us, individually and corporate entities would be how to create value that people will be willing to pay exorbitant asking prices for.

Straight off Ferraris are not a con job.

They deliver performance encased in a design while jaw dropping to look at is tasteful and refined. The experience of driving it or being driven in one (I hear) never disappoints. This almost orgasmic experience they have then gone on to market by being the most successful team in formula racing history, as if we needed any more reminding.

They have tied down the constituent parts of a brand – awareness, experience and association to ensure loyalty.

And then the final stroke of genius is that they have limited supply finally they have limited supply by producing a only a few thousand cars annually .

Applied to personal or corporate brands it’s clear that first you have to be able to deliver, deliver a service or product that is almost beyond reproach and even exceeds expectations. Essentially your offering should speak for itself, preferably get people in gaping awe of you.

But that’s not enough because it’s not true often enough, that if you build it they will make a beaten path to your door. So you need to create awareness about your expertise or the quality of your product.

"Ferrari has shown that succumbing to the temptation of cutting margins and going for a mass product need not be the way to enhance you or your product’s value to the market. Aiming for high end niches that recognise good value and are willing to pay for it is a viable option...

Of course you can be out of business long before the discerning members of society appreciate your value proposition but no one said good things come easy.

With Ferrari we are seeing the finished process, lost behind the hype is the long nights, the periods of debilitating self-doubt and the times when the company trode a lonely but unprofitable path driven solely by a vision that had never been proven – at least with cars.

That the market is willing to pay such a premium for Ferrari’s shares is testament to the success of this near century-old brand building exercise. Its vindication of the founder Enzo Ferrari’s vision of building a high performance luxury car.

The lesson for us is that we can be paid our full value if we take our eyes off the money and focus on building a brand – personal, corporate or even national. The money will come eventually.

THE URGENCY FOR LOCAL RESOURCE MOBILISATION

The Kenyan shilling, just like our own has depreciated sharply against the dollar for more or less the same reasons – a strengthening US dollar against other currencies and falling commodity prices.

In addition Kenya, just like us, are in the throes of an ambitious infrastructure development process to fill the gaps left by years of neglect of their infrastructure and build more to catch up with its growing population’s needs.

But Kenya, unlike us, last year went to debt markets and borrowed $2b to finance its road and rail  and also it was hoped, would make it unnecessary to continue local borrowings. By borrowing locally the Kenya government was forcing borrowing rates for the private sector to rise putting the brakes on economic growth.

However Kenya’s Eurobond was taken out when the dollar was trading at about Kshs88 but is now trading at about Kshs103.  So recent interest payments – they are paid out at the end of the quarter, put a huge strain on the Kenyan treasury to the point that last week the Kenyan press was reporting the government had run out of money to carry out its programs.

Now the Kenyan government is looking to borrow from the domestic markets as a stop gap measure as it scrambles to refinance its Eurobond and hopefully manage some relief that way.

Borrowing from the international markets is not a bad thing in itself, unfortunately it can impose huge exchange risks on an economy that was previously thought to be sound and bring down to its knees.

It has happened before in our recent memory. In the 1990s the south east Asian countries gorged themselves on cheap foreign credit, a lot of it went into real estate investments. When the bubble burst and eth developers could not honour their foreign obligations their currencies collapsed causing a lot of social unrest.

The truth is, as in our personal lives it is much easier to borrow than build up your own independent reserves.

Kenya was shut out by the international lenders at the start of the 1990s and in response built the most sophisticated local resource mobilisation mechanism in the region. So much so that when they were brought back in from the cold after the 2002 polls, they were confident enough to negotiate on more equal footing.

The conspiracy theorists suggest that that kind of economic independence, however limited, was not welcome and Kenya had to be put back in its place, hence their current predicament.

As good a theory as any.

"The larger lesson for us in Uganda, with our own love-hate relationship with the donor community is that there is an urgent need to build our own reserves, not only as matter of economic but also security interest...

This week the National Social Security Fund (NSSF) announced that its strategic target was to grow to sh20trillion from its current sh5.8 trillion in assets under management by 2025. But NSSF would not be the giant institution it is today were it not for government legislation to ensure workers pay a fraction of their salaries into the fund.

Invariably the issue of mobilising resources will come at some cost to our comfort and deepen the frowns in some people’s brows, but those are the kind of farsighted decisions we are going to have to make for our ambition to achieve middle income status as a country to be more than a pipe dream.

Former Chinese leader Mao Tse Tung was determined to make China a nuclear power, but was even more determined that his country not become beholden to the Russians or Americans in chasing this ambition.

He paid for the technology in grain even when there was great famine stalking the nation. It is estimated that up to 30 million of his countrymen died in the pursuit of this ambition.

Not the best of examples, but an illustration of the lengths people have gone before us to become truly self sufficient.

UGANDA OIL PIPELINE THREATENS REGIONAL ALLIANCE

A recent deal between Uganda and Tanzania to explore the viability of a joint pipeline may threaten the relationship with Kenya, which was first in line for the project. Last week Kampala announced it had signed a deal with Tanzania and oil company Total to explore the possibility of an…

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GOOD JOURNALISM GOOD FOR BUSINESS

Last week Kenyan capital Nairobi played host to the 20^th edition of the CNN/Multichoice African Journalist Awards 2015.

The event which has become the continent’s premiere journalism award saw Burkinabe Hyacinthe Sanou win the journalist of the year award with his story on the failed bid by former president Blaise Campaore to ram a constitutional amendment to allow him run for a third term.

During the last two decades of the competition Kenyans have hogged the accolades roping in eight top winners followed by South Africa with five  and Nigeria, three. Uganda has managed a solitary overall victory in 2007.

“The smarter the journalists are, the better off society is. For to a degree, people read the press to inform themselves - and the better the teacher, the better the student body,” US billionaire investor Warren Buffett has said in the past...

That statement need no qualification, which brings into sharp relief of the awards – probably the most sustained effort at awarding African journalists ever.

But there are new changes in the journalism landscape that, prompted by changes in technology primarily and global economics.

For one the press, which include broadcast platforms, no longer have a monopoly over information dissemination.

A discussion hosted for journalists during the three days of events surrounding the award ceremony came to the conclusion --- in not so many words, that social media driven by the growing proliferation of smart phones is muscling traditional media out of the way.

The future of media may very well be that current media powerhouses will be reduced to vetting news from citizen journalists for consumption by their audiences. Consumers may be drawn to them for their credibility. The media houses may fall by the way side if they cannot hold their target markets captive.

Essentially, more than now media houses we live or die by their reputation. The fickleness of the digital crowd means that one mistake will mean herd movements away from one media house to another in case of mistakes or shift in content away from the taste of the consuming public.

Out of necessity the business models of media houses will have to change. They will be leaner, flatter and quicker.

One media owner suggested that the newsroom of the future will have an overabundance of techies, outnumbering regular journalists four-to-one.

This has far reaching ramifications for information dissemination especially in countries in which digital technology is not as developed or is being curtailed.

In the beginning the strongest man was the most powerful; then it was the richest man who could finance armies and project his will beyond his outstretched fist but now and into the future it is the man with the control of information --- its generation and dissemination who rules.

The basis of all wealth is information or knowledge. Any attempt to compromise the gathering and dissemination will put the potential benefactors at a disadvantage.

Which brings us neatly to Buffett --- who says a society is better depending on the quality of its journalists and the CNN/Multichoice awards.

"Behaviour that is celebrated is repeated. Awarding good journalism means good journalism will be repeated....

People may frown at what is celebrated – mostly stories of doom and gloom around the continent, but this does not take away from the rigour and skill required, which can be replicate in other stories that may reflect a more positive outlook.

Improving the business environment is not only restricted to improvements infrastructure and social services but also in the free flow of information, which will allow people to make rational economic decisions.

In fact the asymmetries in access to information between peoples and countries is what accounts for wealth disparities.

In short it’s in the business community’s interest to support good journalism, even if they are not media houses, especially in an environment where governments in their inability to control the message see journalists more as a nuisance than an enabler of development.

BUKENYA AND THE POLITICS OF FLIP FLOPPING

Former vice president Gilbert Bukenya caused a slap-the-forehead moment last week, when he came out to say he was returning to the NRM fold after two years of dabbling in opposition politics and toying with the idea of running for the highest office in the land himself.

Of course condemnation of his about turn flew in fast and furious and to listen to his detractors you would think his political career had suffered an irreparable blow.

That may be as it is, but it is also to ignore the way politics is developing on both sides of the political divide.

To understand the political trends in the country we would have to go back to 1986.

In 1986 when the NRM came to power it was politically thin on the ground as a political organisation. They made two related decisions that ensured they would be a major player in five short years and the dominant player by the time President Yoweri Museveni first put himself up for election in 1996.

To begin with they suspended political party activity. They argued that parties were divisive and they needed everyone reading from one page if Uganda was to climb out of its malaise.

Secondly, they allowed all political competition to be on individual merit. This cut down the clannish political parties influence even further, as now anyone could stand for political office without having to kowtow to the party patriarchs (they were invariably all male).

"These two decisions gave rise to a whole new breed of the politicians who had little allegiance to the old parties and quickly found a home in the NRM. By the time 1996 came around the NRM straddled the political landscape like a colossus and the old parties were scrambling for relevance...

Fast forward to today and you have a situation where the NRM primaries, where in some incidents up to 20 contestants are vying for one position, are the decisive political contests leading up to next year’s polls. In many areas if you are the NRM flag bearer you might as well break out the champagne now, not in March.

With that background any political operator knows that without the NRM behind you, there maybe a long wait in the wilderness before you make it to the high table, if at all.

It’s against this background that Bukenya’s actions – and many others who have come before him and will follow him, should be judged.

It’s all very nice to seat on your  moral high horses and fulminate about principles and morals, but the truth be told,  if you look around at our political elite they are neither employable or able to make a living outside the hand-outs that come with political office.

Much as they couch their decisions in popular rhetoric they are answering very basic bread and butter, existential questions when they make their political calculations.

"After all, in a country where the majority of us are still grappling with issues of poverty, disease and hunger there can be no sharp divides between the political parties on offer. And if our political elite are of the people and by the people it’s hard to see how they can be very different from the rest of us who are still at the bottom of the pyramid of hierarchy of needs...

We may tear out our hair at events but the positive way to look at it is that this is a stage in our democratic evolution.

On the one hand it may take years even decades to play out, so many of us may not be around to see a more enlightened society, but on the other hand, better we go through this now rather than force a higher level of democracy and be forced to regress to baser instincts we had not quite resolved in our past at a later date, when it will be more inconvenient.

SHILLING DEPRECIATION SLOWS UGANDA'S ECONOMIC GROWTH

The Ugandan shilling’s dramatic slide in the last year is putting the economy’s growth prospects under pressure and may force a rethink among planners of how the economy is structured. Read more

UGANDA BRACING ITSELF FOR MORE INFLATION

Inflation seems to be rearing its ugly head again, coming at 7.2 percent in September the highest its been in more than two years. Business Vision’s Paul Busharizi sat down with Bank of Uganda director for research Adam Mugume to talk about the disturbing trend. Below are some excerpts from the interview.

Q.How would you assess this year’s attempts to bring inflation under control?

A. When we started tightening monetary policy in April everybody thought including IMF they thought we were crazy. Inflation was two percent very many people including Ministry of Finance were really not happy with BOU, because they were saying how do you start monetary policy when inflation is two percent? But we insisted we said our forecasts indicate inflation was going to rise.

By then exchange rate was not as volatile as we saw in the last three months. What was driving up forecasts by then was the outlook on the shilling. Because five to six months ago we knew the shilling would fall because we were looking at trade balance, we were looking at the possibility of US tightening monetary policy, but the biggest challenge was the Balance of Payments outlook which was really negative. We said exchange rate would depreciate, after depreciation we would have inflation and any slight food price increase would lead to a big increase in inflation that’s when we started tightening. Our forecasts have been impressive and our pre-emptive action has worked.

By the time we started in the monetary policy meeting we said if we didn’t tighten inflation by December would be 15 percent.

Q. What particular aspects of Balance of Payments were hurt?

A. All inflows were impacted. FDI, workers remittances, exports, tourism were declining. Imports were continued increasing apart from oil that have been declining but the others were still rising. Private sector imports except oil were rising. Imports were rising at 5 percent on a quarter to quarter basis. We knew the exchange rate was going to decline.

We know normally this months of September to November seasonally we normally we have high food prices because this is the planting season. We start harvesting in December and if rains are good we have a bumper harvest in January and February. Our worry is we are projecting a problem if the weather patterns are bad, El Nino affect food crops and the good harvest in January doesn’t come and then we have a spike in food prices that is where we will have a bit of uncertainty. If that happens then what we project inflation coming down will not happen and will call for more tightening.

Q.  SO why not wait for inflation to rear its head and then act? You might make a mistake in premeption?

A. You can’t allow inflation to spike. Once inflation sets in it will take you 12 months to bring it down. If you delay in handling it, it will take you 12 months to bring it down. That is why you have to start much earlier because monetary policy must be pre-emptive if you wait until the thing has come you are wasting your time.

Q. The talk is that its campaign money drivng up inflation?

A. We haven’t seen it. People who say there is a lot of money in this elections we haven’t seen it because even commercial banks are crying they are saying they have no money. If it is money with one or two individuals it can’t cause inflation. But commercial banks are telling you they don’t have money. Because we have been tightening, the source of currency is BOU and also finance has been tightening. Flows from government have been very tight that’s why you see banks are borrowing form the central bank, rediscounting treasury bills so you see a lot of tightness in credit.

  

Q. So in fighting inflation you are reducing growth?

A. You have a trade off. That is why we did it gradually so that the impact in private sector is not so sharp. In 2012 when we increased the policy rates so sharply in a short period its impact on activity was so dramatic that you move from a growth of 9.7 to 3.2 percent within a year’s time. We did not want a repeat.  We wanted a gradual process so activity slows down but does not collapse. If we have a growth of 5.5 percent and we have inflation of between 7 and 8 its better than having inflation of 15 percent because it becomes very hard to manage.

Once inflation takes hold even the growth you are trying to stimulate will not take hold.

"Growth has been affected by about 0.5 percentage points. At the beginning of the year we had projected to have growth of 5.8 to 6 percent but now we think about 5.2 percent is more realistic...

Q. As a result the yields on government paper are shooting up, crowding out lending to the private sector?

A. treasury bonds and bills yields have risen sharply but a combination of many factors not all related to inflation are at play.

I think there are some economic agents, those who participate in the auction they believed the government was so desperate for cash given the budget, which was misunderstood to be sh24trillion then government would be forced to come to the markets. The participants in the market are not convinced that government is serious, they think government is still going to debate the budget so they would rather wait and see. They are more interested in 91-days, they think sometime down the road government may want more money and come to the market so interest in longer term bills is low

Government has to make it clear that they are not desperate to take this money. They have passed the budget, other than borrowing in the range of 25 percent you would rather suspend some of the activities, it doesn’t make sense to borrow as government. If government borrows at 25 % then the private sector will be borrowing at 35 percent which is not good.

Q. SO what are the economic growth prospects?

A. Public investment will stimulate the economy, but also private sector credit has not slowed down as of August, it had grown by 23 percent on an annual basis. But some would say there is some exchange rate impact since some loans are in hard currency but even if you look at the shilling loans they grew 15 percent which is healthy. Overall we have not seen a slowdown in activity that’s why we believe that private sector investment, those already on the ground will not necessarily cut down on investment, we will not necessarily get new FDI but the ones already  in the market will not necessarily slow down because of the monetary policy tightening, we believe private sector credit will remain strong, investment will remain strong, will decline a bit but not stop and then if weather conditions remain conducive then agriculture also should really continue to grow.

UNRA’S FATE IS AN INDICTMENT ON OUR SOCIETY

This week the Uganda National Road Authority (UNRA) board took a chainsaw to its staff, sacking all of them to facilitate a complete overhaul of the organisation, which has become the poster boy for corruption and greed.

The almost 900 workers will be let go over the following weeks but have been given the option to reapply for their jobs when applications are called.

UNRA has said that it needs to almost double its staff complement within the year, so for some of the workers without sticky fingers there is hope.

If there is any doubt about the extent of rot in UNRA, then, that the board was compelled to sack everyone says it all.

Over the last few months we have watched with jaw dropping shock as official after official before the Bamugemereire commission grudgingly revealed, was tied up or was tripped over by the web of lies they needed to spin to cover up the scams that went on at the Authority.

"What was clear is that these officials went about their business – not the official kind, with  impunity, confident that their shenanigans would never come to light, never mind that they were wheezing around in brand new cars, living it up on holidays abroad and sipping cocktails on the verandas of their palatial mansions, right below our very noses...

Weeding out corruption, so entrenched as it is in Uganda will often be a losing battle.

To begin with, pinching from the workplace is the new normal – just because we do not whack people over the head with metal bars or make them surrender their money at gun point does not make it less of a crime.

Secondly, there is no social censure of the corrupt – we even give them pride of place in our churches.

And finally because of the above, we have set the bar on what constitutes corruption very low.

It’s ok to claim per diem for three days when we have only been out of office one day; its ok to use company transport for our private errands; its ok to pilfer a few coins from the office because other people steal more.

Thankfully the days of extra judicial killings are past. But people used to nonchalantly walk around dead bodies on the street as they rushed to work or the location of dumping grounds was a topic discussed over a beer before we moved on to more serious  topics like who is getting married to who and which station is selling fuel the next day.

It was once said that love of the good life is the source of corruption. Wanting a good life, seeking progress need not lead to corruption.

Let us not kid ourselves. Like we have seen with other organisations that were once the epitome of corruption, that when the bad seed was cleaned out the incoming breed was also corrupt, maybe not as corrupt as the first but it was really a matter of degree.

"I continue to disagree with people who maintain that us Africans, Ugandans more specifically, we are inherently corrupt. That we have a demon seed in us, that we cannot help ourselves when money is lying around. One has to admit though, that the anecdotal evidence (no one really gets convicted for these things, do they?) is overwhelming as to suggest we might just be irredeemably flawed....

I have hope, if not in the inherent goodness of the human condition, at least in the inexorable march of progress, call it evolution if you want.

For our businesses to compete with global companies, for government to maintain its relevance by providing better and better services for more and more people, something has to give.

I would like to believe that what will put paid to corruption in our society is when the cons outweigh the pros of allowing a corrupt society to continue.

However, I would warn you not to hold your breath for this day of reckoning