Arvind's Newsletter

1.Tata group is on Fund Raising Spree

After offloading stake in Tata Consultancy Services Ltd., parent Tata Sons Ltd. may be looking at more share sales as India's largest conglomerate seeks capital to fund new businesses.But it is unlikely that Tata Sons will sell shares in any other listed company since, except TCS, it does not own more than 50% in most of the group's listed businesses. 

That suggests initial public offerings could be the potential route to monetise assets. group is gearing up to unveil several public issues in the next two to three years, after a hiatus marked by just one initial public offering (IPO) in the past two decades. This strategic move by holding company Tata Sons aims to unlock value, fund future investments and provide exit options for select investors reported Economic Times.

NDTV Profit reported that Tata Capital, the financial services subsidiary of Tata Sons will be listed by next year, said a senior executive at the Tata Group. The listing of the financial services firm will be in its current form, the person cited above added.

2.Sterlite Power, Singapore's GIC join hands for power transmission platform

Vedanta group company Sterlite Power and an affiliate of Singapore's sovereign wealth fund GIC have signed definitive agreements to set up a new platform to develop and operate power transmission projects in India. Sterlite Power will own the majority stake of 51% and GIC will own the remaining 49% stake, said a joint statement.

Pratik Agarwal, managing director, Sterlite Power said: “India's renewable vision calls for investments in transmission to unlock the full potential of 500 GW of renewable power. This joint venture signals global confidence in India's growth vision. With GIC as our partner, we are poised to play a leading role in India's transmission sector, starting with the $13 billion bid pipeline."

3.India's GAIL to commission its first green hydrogen project in April, reported Reuters

The 10-megawatt proton exchange membrane electrolyser for the green-hydrogen producing unit at the Vijaipur complex in Madhya Pradesh state has been imported from Canada, they added.

The unit is expected to produce about 4.3 metric tons of hydrogen per day, with a purity of about 99.999% by volume, and would use renewable power. India aims to reach 5 million tons of annual green hydrogen production capacity by 2030.

4.Ukraine said a third of all Russian warships in the Black Sea have been sunk or disabled.

While Kyiv has faced setbacks on land, it has been successful at sea, having damaged or sunk, among other things, eight landing ships, a cruiser, and a submarine. 

On Saturday a missile strike on a Crimean dock hit an amphibious Russian landing ship and damaged two others. The strikes have provided a morale boost and helped boost exports by weakening Moscow’s maritime control.

Landing ships are not as vital to the Kremlin now a railroad connects occupied Ukraine to Russia, Forbes reported, but nonetheless, the attacks have been so successful that “the Black Sea Fleet could cease to function in another 18 months.”

5.Chinese-made EVs set to take 25% of European market this year, reported Financial Times

A quarter of electric vehicles sold in the EU this year will be made in China, as the country’s new entrants continue to take sales from local rivals, according to analysis from policy group Transport & Environment. 

About 19.5 per cent of battery cars sold in the bloc last year were manufactured in China, according to the company’s research, owing to rising European sales of Chinese-owned brands such as MG and BYD and factors such as US group Tesla using its Shanghai factory to supply parts of the European market.

That percentage will rise to 25.3 per cent in 2024, according to T&E, as Chinese domestic manufacturers continue to take market share from established European brands across the continent.

While many western manufacturers including Tesla, BMW and Renault make electric cars in China that they import to Europe, Chinese-branded EVs alone are set to account for 11 per cent of the EU’s electric car market this year, rising to 20 per cent by 2027. Chinese brands such as BYD have already risen from 0.4 per cent of the European EV market in 2019 to 8 per cent of sales last year.

At the sametime, BYD profits rose last year but fell short of expectations as Tesla’s main Chinese rival felt the brunt of intensifying competition and slowing sales growth. The world’s biggest electric vehicle producer said net profit rose 81 per cent to Rmb30bn ($4.16bn) in the 12 months to the end of December, compared with analyst estimates of Rmb31bn,as the Warren Buffett-backed group battled increased competition, including from the recent arrival of Huawei in the car market.

6.Taiwan Semiconductor Manufacturing Company is hiring at breakneck speed.

The world’s biggest chipmaker wants to grow its global workforce from 77,000 to 100,000 in just a few years. Meanwhile, key Nvidia partner SK Hynix is investing $ 4 billion in a new chip facility in Indiana.

7.Have McKinsey and its consulting rivals got too big? The Economist

An anonymous memo briefly circled the web in March. The authors, who claimed to be former partners at McKinsey, rebuked the illustrious strategy consultancy for its pursuit in recent years of “unchecked and unmanaged growth”, and chastised its leadership for, of all things, a “lack of strategic focus”. With humility typical of McKinseyites, they warned that “an organisation of genuine greatness” was at risk of being lost.

The memo, which was swiftly taken down, is but the latest murmur of discontent at McKinsey. In January Bob Sternfels, its managing partner, was forced into an internal contest for the top job after he failed to clinch support for re-election from a majority of senior partners in an initial round of voting. Although he ultimately prevailed, the saga hinted at the trouble brewing within the firm.

Not long ago the consulting industry looked indestructible. Fees rocketed during the covid-19 pandemic as clients sped up efforts to digitise their businesses, diversify their supply chains and respond to growing calls to bolster their environmental, social and governance (esg) credentials. The consulting revenues of the industry’s most important firms—including the triumvirate of strategy advisers (Bain, bcg and McKinsey), the “big four” accounting giants (Deloitte, ey, kpmg and pwc) and Accenture (also the world’s largest outsourcer)—grew by 20% in 2021 and then 13% in 2022. 

Since then, however, growth has been soggy for this “great eight”, slowing to around 5% in 2023, according to estimates from Kennedy Research Reports, an industry-watcher, and calculations by The Economist, based on company filings. 

Clients grappling with inflation and economic uncertainty have cut back on splashy projects. A dearth of mergers and acquisitions has led to a slump in demand for support with due diligence and company integrations.

That has caused a headache for the consultancies. When demand from clients looked limitless, they recruited staff like there was no tomorrow. Revenues at McKinsey are up by a third since 2019—but headcount is up by half, to 45,000. As job opportunities at startups and private-equity firms have withered, fewer consultants have left the firms of their own accord, reversing the spike in attrition rates during the pandemic.

Now tomorrow is here, with a vengeance. Bain and Deloitte have paid some graduates to delay their start dates. Newbie consultants at some firms complain that there is too little work to go around, stunting their career prospects. Lay-offs have become widespread. All of the big four have made cuts to their advisory teams. Last year Accenture, the only one of the eight that is publicly listed, said it would fire 19,000 staff. On March 21st it reported that its consulting revenues for the quarter to February shrunk by 3%, year on year, after flattening in the previous quarter.

The consulting industry has made it through choppy waters before, including during the dotcom crash and the global financial crisis. Yet its recovery this time will be complicated by three issues. The first is geopolitics. The consulting giants, all of which are based in the West, have benefited from decades of globalisation during which they spread their tendrils into every corner of the globe. Deloitte, the biggest of the bunch by consulting revenues, has offices in more than 150 countries and territories.

That is now placing the firms in awkward spots. Last month it surfaced that the Urban China Initiative, a think-tank co-founded by McKinsey, provided advice to the Chinese government in 2015 that helped shape its “Made in China 2025” plan, which has sought to reduce the economy’s reliance on foreign know-how and place China at the forefront of sectors from electric vehicles to artificial intelligence. Although McKinsey denied that it wrote the report, some American lawmakers have called for the firm to be barred from American government contracts. In the 12 months to September 2023 the federal government paid McKinsey more than $100m in fees.

Now China is also starting to squeeze foreign advisers out of its market. Last year Dentons, a global law firm, unwound its tie-up with Dacheng, a Chinese one, in response to new cybersecurity and data-protection rules that made the combination unworkable. Although China is yet to produce a homegrown consulting powerhouse, it has already begun to make life difficult for foreign ones. Staff in Bain’s Shanghai office were questioned by Chinese authorities a year ago, for reasons unknown. On March 22nd it was reported that the Chinese government was scrutinising pwc’s auditing work at Evergrande, a bankrupt Chinese property developer that has been accused of fraudulently inflating its revenues. That could weigh on PwC’s consulting business in the country.

It is not only the West’s relationship with China that is causing problems. In February the bosses of bcg, McKinsey and Teneo, a smaller consultancy, along with Michael Klein, a dealmaker, were hauled before a congressional committee in Washington after failing to hand over details of their work for Saudi Arabia’s Public Investment Fund. The committee is investigating Saudi Arabia’s efforts to build “soft power” in America through, for example, its investments in sports such as golf. 

McKinsey and BCG said that their staff in Saudi Arabia could be imprisoned if they divulged details of their work for the country’s sovereign wealth fund. The Persian Gulf has been a rare bright spot for the consultants of late, with the oil-rich states splashing out on advice as they seek to diversify their economies.

Waning enthusiasm for ESG, denounced by critics as “woke capitalism”, presents a second threat to the industry’s recovery. In recent years the consulting giants have spent big on building out their ESG offerings, especially around decarbonisation. In 2021 McKinsey acquired three sustainability consultancies. In 2022 Accenture gobbled up five. So far these investments seem to be paying off. Christoph Schweizer, the boss of BCG, which acquired the environmental consultancy Quantis in 2022, says that sustainability was one of his firm’s fastest-growing areas of work last year.

Whether that growth will continue at the same pace is less clear. In America Republican-run states including Florida and Texas have withdrawn funds parked with BlackRock, the world’s largest asset manager, in protest over its use of esg considerations when making investments. Consulting clients surveyed in January by Source Global Research, another industry analyst, ranked sustainability projects tenth in their list of priorities for the year, down from fourth in 2023. Some consulting grandees admit that certain clients are reining in their climate ambitions. According to one, that is in part because their customers are proving more resistant to paying the resulting premium.

The third and thorniest challenge that lies ahead for the great eight is technological change. For many years clients sought their help to modernise creaky old systems. Increasingly, the consultants themselves are grappling with digital disruption. The boss of a big buy-out firm says that his dealmakers are turning to software tools and data providers rather than pricey consultants for some of the analysis needed to evaluate a target company. Other tasks that legions of consultants once spent hours on, like compiling and categorising data on a company’s spending habits, can now be done at the push of a button.

The consultants are not standing idle. Bain, for example, has redesigned the way it does due diligence on companies, incorporating nifty tools such as web-scraping programs. The firms are also racing to stay one step ahead of artificial intelligence (AI). Last August McKinsey launched Lilli, a ChatGPT-like bot trained on its corpus of frameworks and other intellectual property, which consultants can use to speed up their work. Others have followed suit.

Excitement among clients over such “generative” AI is also creating opportunities for the consultants. Mr Schweizer says that BCG has already completed hundreds of projects with clients around the technology. Accenture has booked $1.1bn worth of generative-AI work in the past six months. Much of this is happening in collaboration with the tech companies developing the AIs. Accenture has been working with Microsoft. In March the consulting firm also announced a partnership with Cohere, an AI-model builder with which McKinsey has buddied up, too. Bain has an alliance with OpenAI, the maker of ChatGPT. BCG has a collaboration with Anthropic, one more AI firm.

Such partnerships look like a welcome source of growth for the consultants. In time, though, they could become a drag—especially if they are successful. The quicker corporate clients become comfortable with chatbots, the faster they may simply go directly to their makers in Silicon Valley. If that happens, the great eight’s short-term gains from ai could lead them towards irrelevance. That is something for all the strategy brains to stew on.